The Income Tax Appellate Tribunal (ITAT), Delhi bench allowed interest expenses claimed under Section 36(1)(iii) of the Income Tax Act, 1961 towards the loan advanced to subsidiary companies for commercial expediency.
The assessee, Intervo Technologies Pvt. Ltd. is engaged in the business of call center operation, maintenance and repairs service, non-technology software services. During the assessment proceedings AO required the assessee to substantiate the claim of interest expenses. AO had observed that assessee has advanced loans to its subsidiary companies.
The AO also pointed out that as the assessee has not levied interest on the funds provided to its subsidiaries, there is no reason why the assessee’s claimed interest charges could not be disallowed proportionately. Thus the AO disallowed interest expense claimed by the assessee.
Aggrieved by the order, the assessee filed an appeal before the CIT(A) who sustained the disallowance. Therefore, the assessee filed a second appeal before the tribunal.
Sidhant Arora, Counsel for assesee submitted that Loans have been advanced to its fully owned subsidiaries. The assessee obtained long-term bank loans in order to satisfy its funding needs.
It stated that assessee and its fully owned subsidiaries had suffered enormous losses over the previous several years. Due to these losses, there was a financial crisis. As a result, the assessee offered interest-free loans to its wholly owned subsidiaries to help them meet their funding needs and pay off their bills.
Further, the counsel for assessee submitted that funds infused by the assessee into its wholly owned subsidiaries were utilized to meet their business needs. These funds were advanced to them out of commercial expediency so as to bring them out from their loss scenario.
G. R. Nirwan, Counsel for Revenue, supported the order of lower authorities.
It was observed by the tribunal that the assessee had borrowed the funds from banks and lent part of it to its subsidiaries as interest free loans.However amounts advanced by the assessee are not for any personal benefit of the directors of the subsidiaries.
Therefore, a holding company has all the interest in its subsidiaries and it would take all the steps to protect its own interest as well as the interest of its subsidiaries.
Therefore, assessee has advanced its interest bearing funds to its subsidiaries out of commercial expediency.
After reviewing the facts and records, the two-member bench of Girish Agrawal, (Accountant member) and Chandra Mohan Garg,(Judicial Member) allowed the interest expenses claimed under Section 36(1)(iii) of the Income Tax Act towards the loan advanced to subsidiary companies for commercial expediency.
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