Bell ceramics (Orient Bell Limited) – Part 3

Case: Bell ceramics (Orient Bell Limited) – Part 3, ITAT Surat

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Issue: Disallowance of interest on the advances to Subsidiary u/s. 36(1)(iii) pending reconsideration of a decision of SC in case of S A Builders in Tulip Star Hotels

Assessee’s Argument

The company had borrowed funds and paid heavy interest on borrowed funds. Further, relying on the decision in case of S A Builders Ltd. v. CIT 288 ITR 1 (SC) wherein the AO in earlier years accepted the claim of the Assessee and did not make any addition on account of interest.  Since the commercial expediency of giving advances was accepted by the AO in the earlier years no addition could have been made in the subsequent years. 

Revenue’s argument

Interest disallowed by the AO on the ground that interest-free advances made by the Company. Further, it was contended that the decision of S A Builders supra is being reconsidered by the Supreme Court in the case of ACIT v. Tulip Star Hotels Ltd. and thus, not valid.

Ruling

Interest-free funds in the form of share capital and reserves were in excess of advances given to subsidiary companies.  The AO has failed to establish that advances to subsidiary was made out of interest-bearing funds.  The decision of the SC in case of S A Builders supra still holds as SLP for reconsideration is still pending and therefore the stand of the AO in earlier years accepting that the advances were given out of commercial expediency is valid.

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Written by CA Bhavin Marfatia, Partner | Direct Tax, KC Mehta & Co.