LENDING TO SISTER CONCERN – NEXUS THEORY |
Partnership Firm - 26 001 (JBC-026) |
Interest Free Loans Granted to sister concerns
In the SUPREME COURT OF INDIA, S.A. Builders Ltd held that the High Court as well as the Tribunal and other income-tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest-free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. In the instant case, neither the High Court nor the Tribunal and other authorities had examined whether the amount advanced to the sister concern was by way of commercial expediency. The High Court and other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with the money, in order to decide whether it was for commercial expediency, but that had not been done.
It is not in every case that interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances. Where holding company, has a deep interest in its subsidiary, and the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the holding company would ordinarily be entitled to deduction of interest on its borrowed loans.
Tin Box Co. (Del) (Important)
| Part of the disallowance on account of interest is not justified where interest free loan were granted to sister concern of the assessee. Also noted that assessee had sufficient funds available to cover the interest free loans to sister concerns. |
Radico Khaitan Ltd. (All) (Important) | Assessee company had sufficient funds other than the borrowed money for giving the amount in question as loan to its sister concern, which finding had not been specifically challenged in the present appeal, the conditions of section 36(1)(iii) of the Act had been complied with and, therefore, the assessee company was entitled to full allowance of the amount of interest paid by it on borrowed capital. |
S. A. Builders Ltd. (Supreme Court of India) (Important) | Interest on money borrowed from bank and lent to sister concern without charging interest whether allowable ? Test is same as that for allowance of business expenditure, viz., “for the purpose of the business”. It will be allowable if made as a measure of commercial expediency. |