Allowance of interest on bank loan is case of Advance to subsidiary & Loans to directors out of reserves

CA.V.Vivek Rajan

Brief Facts

AY-1988-1989

a. The assessee had advanced a sum of Rs.1,16,26,128 to its subsidiary company, Hero Fibers Limited and this advance did not carry any interest. The assessee had also borrowed money from the banks at the rate of interest of 18% and had claimed this interest as business expenditure. The claim of interest was Rs.20,53,120.

b. The assessee had also given advances to its own directors for a sum of Rs. 34 Lakhs on which interest was charged at the rate of 10%.

Question of Law

a. Whether the advances given to the subsidiary falls within the scope of commercial expediency, thereby entitling the allowance of interest?

b. Allowance of interest on bank loan in case of loan to directors out of free reserves?

Contention of the Assessee

Advance to Hero Fibers Limited

a. It had given an undertaking to financial institutions to provide Hero Fibers Limited, the additional margin to meet the working capital.

b. It was the duty of the assessee as a promoter of Hero Fibers Limited with controlling stake, to give such an undertaking to the financial institutions.