The Hon’ble P&H in two decisions reported in July 2015 has diluted the impact of decision in case of Abhishek Industries vs. CIT 286 ITR 1 wherein the Hon’ble High Court had laid down that disallowance u/s 36(1)(iii) is warranted if interest free advance is given coupled with fact that assessee has outstanding interest bearing loans and nexus theory is not required to be proved by Revenue.
Now, the Hon’ble High Court in CIT vs. Rakesh Gupta in ITA No. 37/2014 dtd. 2/7/2015 has laid down as under:
“As regards question (i), the appellant’s case is that an amount of Rs 8.89 crores was advanced by the respondent/assessee to his son. The respondent/assessee on the other hand contends that during the assessment year in question 2008-2009, only about Rs 2.14 crores was advanced by him to his son. It would make no difference. The Tribunal has rightly upheld the detailed and reasoned order of the CIT (Appeals). The CIT (Appeals) has analyzed the cash available with the respondent. For instance, the opening balance of capital as on 01.04.2007 was about Rs 13.45 crores and the closing balance as on 31.03.2008 was about Rs 10.40 crores. The opening balance as on 01.04.2007 was about Rs 73.57 crores and the closing balance as on 31.03.2008 was about Rs 86.60 crores. The opening balance of interest free unsecured loans from family and friends as on 01.04.2007 was about Rs 55.95 crores and the closing balance of interest free unsecured loans from family and friends as on 31.03.2008 was about Rs 51.46 crores. It was not the case of the AO that the assessee had diverted the funds borrowed on interest for the purpose of advancing the sum to his son for business. The Tribunal noted ITA-37-2014 3 that the AO had in fact accepted that no such borrowed funds had been diverted/advanced by the assessee to his son. There was no nexus between the funds borrowed by the assessee and the funds diverted/advanced to his son. There were free reserves available with the assessee to advance the interest free loan to his son.”
Further the Hon’ble P&H HC in Bright Enterprises Pvt Ltd laid down as under:
“The following facts, therefore, stand established. M/s Kolkatta Hotels Private Limited is a sister concern of the appellant by virtue of the appellant holding 88.75% of its equity shares. The appellant invested a huge amount of about Rs.18 crores in the sister concern. The appellant and its sister concern are in the same business. For the point under consideration, it may not have made any difference even if they were not in the same business. However, the fact that they are in the same business is a further aspect in the appellant’s favour. The parties admit that the appellant advanced the said sum of about Rs.10.29 crores to the appellant’s sister concern free of interest. The share purchase agreement and in particular Article-3, clause 3.3(b) indicates that the appellant had to pay various amounts towards discharging the liabilities of the sister concern including towards voluntary retirement scheme under implementation by ITDC to its employees, dues of the municipality, electricity charges and lease rent. Whether the amount of Rs.10.29 crores was debited to the account of the sister concern in respect of the payment made under Clause 3.3(b) of Article 3.1 of the share purchase agreement or whether the amount was actually paid to the sister concern and used by it for the purpose of business, is immaterial. Either way the amount was used for the business of the sister concern. It is not even suggested that the advance was used by the sister concern for any purpose other than for the purposes of its business. Nor was such a case raised before us. The doubt, if any, is set at rest by the memorandum of appeal and the written submissions filed by the appellant before the CIT (Appeals). As Mr. Jain rightly pointed out, in the memorandum of appeal, the appellant expressly stated that it had advanced the amount of about Rs.10.29 crores to its sister concern as a measure of commercial expediency for the purpose of business. In the written submissions, the appellant inter alia stated that the appellant and the sister company were in the hotel business; that the Board of Directors of the two companies was the same; that the appellant purchased the shares of the sister company as an investment and that the investment and advances were made for the purposes of business. From the order of the CIT (Appeals), it is evident that the department never contended that the amounts were not advanced for commercial expediency. Nor was it contended that the amounts advanced were used by the sister company for any purpose other than for the purpose of its business. Indeed, such a case was not even advanced before the Tribunal. The CIT (Appeals) was, therefore, entirely justified in coming to the conclusion that the amount was advanced by the appellant to its sister concern on account of commercial expediency and that the advance was used by its sister concern for the purposes of its business. The additional facts further establish the findings.The Tribunal’s observation that there is nothing on record that the money advanced by the appellant to its sister company had been used as a measure of commercial expediency, was not justified. The appellant furnished all the documents in this regard. The appellant expressly stated that the amounts had been utilized for commercial activity. This assertion was never denied. The appellant was not required to do anything further to establish its assertion that its sister company had utilized the amounts for the purposes of its business. The finding of the Tribunal is not based on any material. It is important to note that the Tribunal had not even suggested that such a case was put to the appellant or its authorized representative and that despite the same the appellant failed to establish the same. The view of the Tribunal that the CIT (Appeals) had not considered the decision of the Supreme Court in S.A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals) and another (supra) in “right spirits” and that the CIT had wrongly interpreted the judgment is not well-founded. In S.A Builder vs. CIT (supra), the Supreme Court observed:-
“It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency.”
It is precisely this test that was applied by the CIT (Appeals). The commercial expediency in advancing the amount is established beyond doubt. The appellant owns about 89% of the equity capital. A Division Bench of this Court in CIT vs. Marudhar Chemicals & Pharmaceuticals (P) Ltd., (2009) 319 ITR 75 (P&H) held:-
“Section 36(1)(iii) of the Act provides that “the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession” has to be allowed as a deduction in computing the income under section 28 of the Act. The expression “for the purpose of business” has been held to be wider in scope than the expression “for the purpose of earning income, profits or gains”. It has been held in S.A. Builders Ltd.’s case (supra) that when the assessee borrowed the fund from the bank and lent some of it to its sister concern as an interest free loan, then the real test to allow the interest as deduction under section 36(1)(iii) of the Act is whether this was done as a measure of commercial expediency. It has been held that in order to claim a deduction, it is enough to show that the money is expended, not on necessity and with a view to direct and immediate benefit, but voluntarily and on account of commercial expediency and in order to indirectly to facilitate the carrying on the business. The expression “commercial expediency” is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. In S.A. Builders Ltd.’s case (supra), it was held that in order to decide whether it was for commercial expediency, the authorities and the courts should have examined the purpose for which the assessee advanced money to its sister concern and what the sister concern did with the money. It was further held that it is not relevant whether the assessee has utilized the borrowed amount in its own business or has advanced the same as interest free loan to its sister concern. What is relevant is whether the amount, so advanced was as a measure of commercial expediency or not. It is not necessary that the amount so advanced is earning profit or not but there must be some nexus between expenses and the purpose of business.” It is important to note that the Division Bench in arriving at its conclusion followed the judgment of the Supreme Court in S.A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals) and another (supra). The Division Bench, in fact, after remanding the matter, expressly directed the Tribunal to consider the matter in the light of the principles laid down by the Supreme Court in S.A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals) and another (supra). The appellant’s case meets each of the tests stipulated by the Division Bench. In fact, it meets a higher test. When a holding company invests amounts for the purpose of the business of its subsidiary, it must of necessity be held to be an expense on account of commercial expediency. A financial benefit of any nature derived by the subsidiary on account of the amounts advanced to it by the holding company would not merely indirectly but directly benefit its holding company. In the case before us, the subsidiary had to be funded to a large extent for otherwise it would not have survived. If it had not survived and had gone into liquidation, the appellant would have suffered directly on account of an erosion of its entire investment in the subsidiary. In this case, the financial assistance was not only prudent but of utmost necessity for without it the subsidiary would have suffered grave financial prejudice. The Tribunal, therefore, erred in coming to the conclusion that the CIT (Appeals) had not considered the judgment of the Supreme Court in the correct perspective. With respect, we find that the Tribunal has not even analyzed the judgment of the Supreme Court in S.A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals) and another (supra). As we noted earlier, the funds/reserves of the appellant were sufficient to cover the interest free advances made by it of Rs.10.29 crores to its sister company. We are entirely in agreement with the judgment of the Bombay High Court in Commissioner of Income Tax vs. Reliance Utilities & Power Ltd., (2009) 313 ITR 340, para-10, that if there are interest free funds available a presumption would arise that investment would be out of the interest free funds generated or available with the company if the interest free funds were sufficient to meet the investment. The Assessing Officer’s view that the advance was not for business purposes as the appellant had no business dealings with the sister company is erroneous. Commercial expediency in advancing loans does not arise only on account of there being transactions directly between the holding company and the subsidiary company or between the group companies inter se. The two companies may even be in a different line of business. It would make no difference. It would still be commercially expedient for one group company to advance amounts to another group company, if, for instance, as a result thereof the former benefits. In the present case, as we have already demonstrated, there would be a direct benefit on account of the advance made by the appellant to its sister company if the same improves the financial health of the sister company and makes it a viable enterprise. We hasten to add that it is not necessary that the advance results in a positive tangible benefit. So long as the amount is advanced with that view in mind or with any other commercially expedient view in mind that is sufficient.”