Bombay High Court in its latest judgement in case of Essar Infraprojects Ltd [Income Tax Appeal No. 927 of 2018] held that interest-free advances from interest-bearing funds to subsidiaries are allowable for business purposes.
In the instant case, the assessee company was engaged in operating amusement parks, infrastructure development management, and finance activities. It extended an interest-free loan to its subsidiary for business purposes. Revenue held that interest-bearing funds were diverted through interest-free advances, leading to the disallowance of the entire interest expense claimed by the assessee. However, the CIT(A) dismissed this disallowance, asserting that the investment in the subsidiary was integral to the assessee’s business operations.
Upon appeal by the revenue before ITAT, the ITAT upheld the CIT(A)’s decision, and held that the funds provided by the assessee to its subsidiary were indeed for business purposes. Since the assessee had established the subsidiary to undertake infrastructure projects on its behalf, the nexus between the advance of funds and the assessee’s business activities was recognized and accepted. Consequently, the ITAT held that there shall be no disallowance of interest expenses incurred on interest bearing funds which were eventually advanced to subsidiary for its business purpose.
Upon further appeal by the revenue before Bombay HC, it upheld the order of Mumbai ITAT. Reliance was placed on the view taken by Delhi HC in case of Dalmia Cement (Bharat) Ltd [(2002) 254 ITR 377 (Del HC)] where it was reiterated that the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case.
Bombay HC dismissed the appeal filled by revenue stating that ‘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’.
The above judgement of Bombay High Court is a welcome judgement as it ensures that decision taken by management of companies based on commercial expediency are accepted and no interference is made by revenue by directing on the formats inter-group transactions.
For detailed discussion on above case law, please feel free to contact devadhhantu@devadhaantu.in