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In the context of holding subsidiary companies having current account lending transactions by a subsidiary to holding company the Madras High Court in [2020] 15 ITR-OL 691 (Mad) upheld the universal stand of the three authorities below in disallowing interest cost incurred on borrowed funds after it found following two revealing facts:
  1. While holding company which also held borrowings from banks managed interest-free loan from its subsidiary;
  2. The subsidiary company also absorbed operational expenses of the holding company in its books.
The piece of a joint development agreement between the two entities did not yield any benefit to uncover the face of alleged commercial expediency in this case as much as the High Court held that the allowability or otherwise of an interest payment under section 36(1)(iii) depends on the facts and circumstances of the case as guided by the Hon’ble Supreme Court decision in S. A. Builders Ltd. v. CIT.
In sum and substance, the Court affirmed AO’s contention that there was no necessity for the subsidiary to give any advance to the holding company much less any necessity for the holding company to have borrowed from the subsidiary for the fact each of the two had borrowed loans from banks and therefore to rotate funds interest-free inter se got to be checked

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