2022 (4) TMI 338 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on interest disallowance under Income Tax Act

ACIT Corporate Circle 6 (2), Chennai Versus M/s Sundaram Fasteners Ltd.

The Tribunal upheld the CIT(A)'s decision to delete the interest disallowance under Section 36(1)(iii) of the Income Tax Act for Assessment Years 2006-07 ... Disallowance of interest u/s 36(1)(iii) - proof of sufficient cash generation to advance loans - CIT(A) deleted the impugned additions - DR advanced arguments to submit that the test of commercial expediency was not satisfied by the assessee - HELD THAT:- A part of the loans and equity investments have been made in M/s TVS Infotech Ltd. which facilitated IT operations for the assessee. The earlier loans as granted to M/s SFZL were utilized to expand overseas market. It is also an undisputed fact that all these entities generated dividend and the assessee was benefitted by way of dividend, capital appreciation and ease of operations. The test of commercial expediency, in our opinion, was duly satisfied by the assessee. It could be said that the investments were made in furtherance of business interest and the ratio of decision of Hon’ble Supreme Court in the case of CIT V/s S.A. Builders [2006 (12) TMI 82 - SUPREME COURT] would favor the case of the assessee. In this decision, it was held that once nexus was established between the expenditure and the purpose of the business, which need not necessarily be the business of the assessee itself, revenue could not disallow the claim assuming what was reasonable. Assessee is successful in establishing that there was sufficient cash generation to make the aforesaid investments. In fact, overall interest free loans have reduced from ₹ 3605.38 Lacs to ₹ 3337.22 Lacs during the year. As against this, there was sufficient cash generation to source this investment. Therefore, as per the ratio of Hon’ble Supreme Court in the case of CIT V/s Reliance Industries Ltd. [2009 (1) TMI 4 - BOMBAY HIGH COURT] it could be presumed that the investments were made from interest free funds available with the assessee. the assessee has sufficient cash generation to advance loans. In the present case, the loans have been advanced in furtherance of assessee’s business interest and the assessee has sufficient cash generation to fund those advances. These facts have already been noted by us in the preceding paragraphs. - Decided against revenue. Issues Involved:1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.Detailed Analysis:Background and Context:The appeals by the revenue pertain to Assessment Years (AY) 2006-07 and 2007-08, challenging the deletion of interest disallowance by the Commissioner of Income Tax (Appeals) [CIT(A)]. The disallowance was initially made by the Assessing Officer (AO) and subsequently deleted by CIT(A) based on prior Tribunal decisions in the assessee's favor for AYs 2003-04 and 2005-06. The revenue's contention is primarily focused on the lack of commercial expediency in granting interest-free loans to a subsidiary company.Issue 1: Commercial Expediency of Interest-Free Loans:The primary issue revolves around whether the interest-free loans provided by the assessee to its subsidiary, Sundaram Fasteners Investment Ltd. (SFIL), were commercially expedient. The AO argued that the business objectives of SFIL were distinct from those of the assessee, and hence, the loans did not serve the assessee's business purposes. The AO also noted that the assessee failed to prove that these advances were made from non-interest-bearing funds, leading to the disallowance of interest amounting to Rs. 270.52 Lacs.Issue 2: Reliance on Previous Tribunal Decisions:The CIT(A) deleted the interest disallowance by relying on Tribunal decisions in the assessee's favor for earlier years (AYs 2003-04 and 2005-06). The revenue's appeal argued that the CIT(A) should have considered that the revenue had challenged those Tribunal decisions in higher courts, and similar disallowances were upheld by the Dispute Resolution Panel (DRP) for AYs 2012-13 and 2013-14.Appellate Proceedings and Arguments:During appellate proceedings, the assessee contended that the loans were advanced out of its own funds and were in furtherance of its business interests. It was argued that SFIL, being a wholly-owned subsidiary and an investment arm, promoted new ventures and made investments on behalf of the assessee. The assessee also highlighted that SFIL's activities, such as granting loans and acquiring shares, were aligned with the assessee's business interests, thereby satisfying the test of commercial expediency. The CIT(A) accepted these arguments, noting that the assessee had sufficient cash generation and net worth to grant these interest-free loans.Tribunal's Findings and Adjudication:The Tribunal examined whether the loans to SFIL were commercially expedient. It was noted that SFIL, as an investment company and a registered Non-Banking Financial Company (NBFC), promoted new ventures and made strategic investments that benefitted the assessee through dividends, capital appreciation, and operational efficiencies. The Tribunal found that the loans facilitated the assessee's business interests, such as expanding overseas markets and enhancing IT operations through investments in entities like TVS Infotech Ltd.The Tribunal also considered the assessee's financial position, noting that there was sufficient cash generation to make the interest-free loans. The overall interest-free loans had reduced during the year, and the investments were made from interest-free funds available with the assessee. This was supported by various judicial precedents, including the Supreme Court's decision in CIT V/s S.A. Builders, which emphasized that once a nexus between the expenditure and the business purpose is established, the revenue cannot disallow the claim.Conclusion:The Tribunal upheld the CIT(A)'s decision to delete the interest disallowance, concluding that the loans were commercially expedient and made from sufficient cash generation. The appeals for both AY 2006-07 and 2007-08 were dismissed, affirming that the assessee's actions were in furtherance of its business interests and aligned with judicial precedents.Order Pronounced:The appeals for both AY 2006-07 and 2007-08 stand dismissed as of 01st April 2022.