Interest expenditure – Advances to sister concerns – Commercial expediency – S. A. Builders v. CIT needs reconsideration.

The respondent-assessee had borrowed certain funds which were utilised by the assessee to subscribe to the equity capital of the subsidiary company, namely, M/s. Tulip Star Hospitality Services Ltd. This subsidiary company used the said funds for the purpose of acquiring the Centaur Hotel, Juhu Beach, Mumbai, which is now functioning as “The Tulip Star, Mumbai”. The assessee paid interest on the borrowed money. This interest liability incurred by the assessee was claimed by it as deduction on the ground that it was business expenditure. The Assessing Officer refused to allow the expenditure.

However, the Commissioner of Income Tax (Appeals) reversed the decision of the Assessing Officer and the opinion of the Commissioner of Income Tax (Appeals) was confirmed by the Income Tax Appellate Tribunal.

The Tribunal noted that the assessee was in the business of owning, running and managing hotels. For the effective control of new hotels acquired by the assessee under its management, it had invested in a wholly owned subsidiary, namely, M/s. Tulip Star Hospitality Services Ltd. On this ground, relying upon the judgment of the Supreme Court in the case of S.A. Builders Pvt. Ltd. v. CIT [2007] 288 ITR 1, the Tribunal held that the assessee was entitled to the deduction of interest on the borrowed funds.

On an appeal, the Delhi High Court inter alia held that the expenditure incurred under the aforesaid circumstances would be treated as expenditure incurred for business purposes and was thus allowable under section 36 of the Act.

On a further appeal, the Supreme Court was of the opinion that S.A. Builders Ltd. v. Commissioner of Income Tax, reported in 288 ITR 1, needed reconsideration. The Supreme Court therefore issued notice on the SLP.