Business expenditure – Interest on borrowed funds – Section 36(1)(iii) – A. Y. 2005-06 – Assessee advancing money to its sister concern owning 89% of share capital free of interest – Holding company investing money for purpose of business in its subsidiary company amounts to expense on account of commercial expediency – Assessee entitled to deduction u/s. 36(1)(iii)

In the A. Y. 2005-06, the assesee had advanced moneys to its sister concern of which the assessee was owning 89% of equity capital. The Assessing Officer disallowed the interest paid by the assessee on the loans taken from banks observing that if the assessee did not advance money to its sister concern without charging interest, it would be left with sufficient funds to return the bank loan and the assessee would not have to pay interest to the bank. The Assessing Officer further held that the advance made to the assessee’s sister concern was not for business purposes, since the assessee had no business dealings with the sister concern. The Tribunal upheld the disallowance on the ground that the assessee failed to establish that the money advanced by the assessee to the sister concern was used as a measure of commercial expediency.

On appeal by the assessee, the Punjab and Haryana High Court reversed the decision of the Tribunal and held as under:

“i) Whether the amount was debited to the account of the sister concern in respect of the payment made or the amount was actually paid to the sister concern and used by it for the purpose of business, was immaterial. Either way, the amount was used for the business of the sister concern. It was not even suggested that the advance was used by the sister concern for the purpose other than for the purpose of its business.

ii) In the memorandum of appeal, the assessee expressly stated that it had advanced the amount to its sister concern as a measure of commercial expediency for the purpose of business. This assertion was never denied. The assessee owned 89% of the equity capital of the sister concern. When a holding company invested money for the purpose of the business of its subsidiary, it must necessarily 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 amount advanced to it by the holding company would not merely indirectly but directly benefit its holding company.

iii) There would be direct benefit on account of the advance made by the assessee to its sister company, if it improved the financial health of the sister company and made it a viable enterprise. But it was not necessary that the advance results in a positive tangible benefit. Thus the assesee was entitled to the deduction u/s. 36(1)(iii) of the Act.”