Facts of the Case

The Revenue filed an appeal under Section 260A challenging the order of the Income Tax Appellate Tribunal (ITAT), which had deleted disallowance of interest expenditure amounting to ₹5.68 crores claimed by the assessee.

The assessee, engaged in real estate development, had:

  • Borrowed substantial funds from banks and paid interest thereon.
  • Advanced interest-free loans and funds to sister concerns and group entities.
  • Made advances for land purchases and share application money.

The Assessing Officer disallowed interest expenditure alleging diversion of borrowed funds for non-business purposes.

Issues Involved

  1. Whether interest on borrowed funds is allowable under Section 36(1)(iii) when interest-free advances are made to sister concerns.
  2. Whether such advances were made out of borrowed funds or own funds.
  3. Whether the concept of “commercial expediency” justifies such advances.

Petitioner’s Arguments (Revenue)

  • The assessee diverted interest-bearing funds to group companies without charging interest.
  • Such diversion was not for business purposes and hence interest should be disallowed.
  • The assessee failed to produce certain agreements supporting advances.

Respondent’s Arguments (Assessee)

  • The advances were made as part of overall business strategy and fund management of the group.
  • Interest-bearing loans were used strictly for project purposes.
  • Advances to sister concerns were made from own funds, including customer advances and internal accruals.
  • Commercial expediency justified such transactions.

Court Findings / Order

  • The Court referred to the landmark judgment in S.A. Builders Ltd. vs. CIT (2007) 288 ITR 1 (SC) emphasizing commercial expediency as the key test.
  • It acknowledged that interest-free advances to sister concerns can be allowable if made for business purposes.
  • The Tribunal had observed that even if advances were presumed non-business, they did not exceed the assessee’s own interest-free funds.
  • The High Court held that the matter required detailed consideration and issued notice, refusing to dismiss the appeal at the admission stage.

Important Clarifications

  • The principle of commercial expediency remains central in determining allowability of interest.
  • Revenue cannot question business decisions if they are commercially justified.
  • If sufficient own funds are available, presumption arises that advances are from such funds, not borrowed funds.
  • Each case must be examined on facts, particularly fund flow and purpose of advances.

Sections Involved

  • Section 260A – Appeal to High Court
  • Section 36(1)(iii) – Deduction of Interest on Borrowed Capital
  • Section 37 – General Business Expenditure

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:349-DB/SKN17012019ITA11592018.pdf

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