TaxTMI 
TaxTMI 
2025 (6) TMI 697
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....n account of disallowance under section 36(1)(iii) of the Act was deleted. 2. Whether the Ld. CIT(A) erred in ignoring the facts of the case that during the assessment proceedings, the assessee had failed to substantiate the correctness of the claim of expenditure in relation to income which does not form part of the total income during the relevant assessment year. 3. Whether the Ld. CIT(A) erred in ignoring the facts of the case that Assessing Officer rightly followed the CBDT circular and legal precedence in disallowing expenses even though no exempt income has been earned in subject AY. 4. Whether the Ld. CIT(A) erred in ignoring the facts of the case that during the assessment proceedings, the assessee had failed to substantiate the reason behind transfer of its interest-bearing funds borrowed were advanced as loans to its subsidiary company without charging any interest on the same during the relevant assessment year." 4. Coming to the Revenue's former substantive ground seeking to revive section 14A r.w. Rule 8D disallowance, learned CIT-DR could hardly dispute the clinching fact that the assessee has not derived any exempt income in the relevant previous year. Fa....
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....owing submissions: "We bring to your kind notice through the analysis of sources and application of funds as per enclosed chart. Out of total borrowings of Rs. 155.25 Crore and Rs. 5.12 Crore, the interest bearing loans were 124.3 Crore the balance Rs 36.07 Crore was interest free, Share Capital and Reserve to the tune of Rs. 342.75 and 18.26 respectively, other interest free loan from subsidiary Rs. 112.09 Crore. Therefore, the assessee was having interest free funds to the time of 509.17 Crore. In we look at the amounts given as loan, die same were 25.56 Crore, this consists only 11.9 Crore which was interest free and Rs 50 lac was interest hearing and 13 16 Crore was given to wholly owned subsidiaries Regarding loan of Rs. 213.42 Crore. Rs. 202.13 Crore was interest bearing and the interest there from has already been duly accounted for. Only 9 crore was interest free and 2.29 Crore was the amount of TDS. Therefore, if we look at the loans which were interest free the total amount is worked out at Rs. 20.9 Crore as against the available interest fee sources to the time of Rs. 509.17 Crore On the basis of above facts and enclosed chart, there is no utilization of interest beari....
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....ended is as under: As on 31 03.2018 As on 31.03.2017 Share capital 342,74,73,000 342,74,73,000 Reserve & Surplus 18,25,72,000 23,62,27,000 Total 361,00,15,000 366,37,00,000 2. Interest free loans from subsidiary (other xxxxxx) Rs. 112,08,34,000/- as on 31.03.2018 and were Rs. 119,15,81,000/- as on 31.03.2017. 3. Thus, the total interest free funds available with the appellant as on 31.03.2018 were Rs. 509.17 Crores against the correspondence figure of Rs. 185.52 Crores as on 31.03.2017. 4. As per the show cause issued by the Assessing Officer, it was alleged that appellant has advanced loan amounting to Rs. 25.56 Crores and Rs, 213 43 Crores. 5. As per the appellant, as on 31.03.2018 the total application of funds includes Rs. 202 63 Crores of interest bearing loans and Rs. 20.9 (.cores as interest free loans. 6. Therefore, the appellant submitted that during the year the appellant had adequate own funds to lie used for extending interest free loans. 4.3.5 At this stage the relevant extracts of the show cause notice, initial reply of the appellant and final reply of the appellant is reproduced as under: 1. "Vide notice u/s 142(1) of the Income Tax ....
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....s per show cause, we take the amount of Investments in subsidiary and group companies at Rs. 310.49 Crore, the interest free funds to the nine of Rs. 162.61 Crore (342.75+ 18.26 +112.09) -(310.49) remains with the assessee. Total funds advanced interest fee was at Rs. 20.9 Crore as has been explained in our previous reply. Considering the totality of facts it is apparently clear that the assessee has not utilized interest bearing funds for interest free advances." 4.3.6 Thus, as per the submission made by the appellant before the Assessing Officer only an amount of Rs. 20.9 crore was extended as interest free loan and the same was out of the interest free funds available with the appellant. Appellant had submitted the details of short term and long term loans and worked out the amount of interest free loan extended was Rs. 20.0 Crores. Based on the tabular information submitted by the appellant as per the assessment order, the details of interest free loans has been computed as under: Short Term Loans & Advances given during FY 2017-18 Sr. No Particulars Opening Balance Addition Received Interest Received TDS Claimed Closing Balance 1 Spring Trading Pvt. Ltd 18306086....
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....9 301543 30154 255631236 Non Interest Beating Long term Advances extended to other entities during the year total 134931384 Non Interest Bearing Advances extended during the year 224902384 4.3.7 Therefore, as submitted by the appellant, the interest free loans extended were of Rs. 20.9 Crores and as per the computation above these interest free loans were of the amount of Rs. 22.49 Crores. Even if we add Rs. 13.16 crores (advanced to subsidiary companies), the total figure could he funded through Interest free funds of appellant company. As analyzed earlier in this order the appellant had a minimum amount of own funds available during the year at Rs. 361.00 Crores, which is only the sum of the share capital and reserves and surplus. 4.3.8 In the assessment order the Assessing Officer had mentioned that the appellant has not offered any interest income. He had further observed that the appellant's claim that it has charged interest on certain amount of loans and advances is not true. However, as per records the appellant had offered revenue from operation at Rs. 7,86,12,000/- and an amount of Rs. 7,86,12,414/- has been shown as interest received during FY 2017-18. The....
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....- free funds of its own which had been generated in the course of the year commencing from 1-4-1999. Apart from that in terms of the balance sheet there was a further availability of Rs. 398.19 crores including Rs. 180 crores of share capital. In this context, in our opinion, the finding of fact recorded by CIT(Appeals), and ITAT as to availability of interest-free funds really cannot be faulted. 10. If there be interest-free, funds available to an assessee sufficient to meet its investments and al the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd.'s case (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd.'s case (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The S....
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....fied in deleting the disallowance under section 80M of the Act on the presumption that when the funds available to the assessee were both interest free and loans, the investments made would be out of the interest free funds available with the assessee provided the interest free funds were sufficient to med the investments. The resultant SLP of the Revenue challenging the Bombay High Court Judgment was dismissed both on merit and on delay by this Court. The merit of the above proposition o f law of the Bombay High Court would now be appreciated in the following discussion. 18. In the above context, it would he apposite to refer to a similar decision in CIT v. Reliance Industries Ltd. [2019] 102 taxmann.com 52/261 Taxman 165/410 ITR 466 (SC) where a Division Bench of this Court expressly held that where there is finding of fact that interest free funds available to assessee were sufficient to meet its investment it will be presumed that investments were made from such interest free funds." 4. ITAT Mumbai in the case of Vodafone India Ltd Vs ACIT in ITA No. 216/CMANDI/2011 in its recent order dated 16.03.2023 held that once it is established that the funds are used wholly and excl....
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....judgment of Hon'ble Supreme Court of India in South Indian Bank Ltd. vs Commissioner of Income fax (2021) 130 taxmann.com 178 (SC) and S.A Builders Ltd VS. Commissioner of Income Tax (Appeals), Chandigarh (2007) 158 Taxman 74 (SC) and Commissioner of Income Tax vs. Reliance Utilities and Power Ltd. (2009) 178 taxman 135 (Bombay) to contend that when there are funds available, both interest free or loan taken, then a presumption would arise that investments would he out of interest free funds generated or available with the company provided said funds arc sufficient to meet investments. Further to contend that same are allowable as business expenditure even if there was no legal obligation incurred the expenses. 10. Ld. Sr. DR however submitted that the orders passed are on merits and the assessee was unable to cite business exigencies requiring the landing of such huge amounts without interest. 11. In this context, it can be observed that from the paper book that the copy of balance sheet as on 31st March, 2013 at page no. 9 of the paper book reflects that on 31st March, 2012 reserve and surplus stood at 3,614,09,442/- on March 31, 2013 there were Rs. 299,28,41,397/-. The a....
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....appellant/assessee." 4.3.10 Hon'ble High Court of Allahabad in the case of Ganpati Associates [2017] 395 ITR 562 has held that where assessee had taken loan for business purpose, utilized same in business and had paid interest on it, denial of deduction under section 36(1)(iii) on ground that assessee had given interest-free advances to its partners was not tenable. The relevant extracts of the order are as under: "14. Now coming to the second question referred to above, the assesses appellant has taken loan for business purposes from various sources including U.P.F.C. and Bank of Baroda and had paid interest thereon amounting to Rs. 5,93,644/-. It claimed deduction of the said amount under Section 36(1) (iii) of the Act but the authorities denied the said deduction on the. ground that the assesses has given interest free advances to its partners which means that it had surplus money which could have been utilized to clear off the. loan so as to reduce the interest liability. 15. In order to get the benefit under Section 36(1) (iii) of the Act it is settled in law that only three factors are relevant namely that the assesses had borrowed money for business purpose; it has....
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....und of commercial expediency the interest thereon could not have been allowed under section 36(1) (iii) of the Act. In Madhav Prasad Jatia's case (supra), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named. It was held by this Court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 27. Thus, the ratio of Madhav Prasad Jatia's case (supra) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1) (iii) of the Act. 28. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 29. It has been repeatedly held by this Court that the expression 'for the purpose of business is wider in scope than the expression for the purpose of earning profits vide CIT Vs. Malayalam Plantations Ltd. [1964] 53 ITR 140, CIT Vs. Birlu Cotton Spg. & Wvg. Mills Ltd. [1971] 82 ITR 166 etc. 30....
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....any advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. " 4.3.12 Based on established case laws, including CIT vs. Reliance Utilities and Power Ltd. (2009), here, it is reasonable to presume that if a company has both interest-free funds and borrowed funds, investments arc made using the interest-free funds, provided they are sufficient to cover (he investments. The Assessing Officer disallowed the interest paid on loans debited in the Profit & Loss Account for the year under Section 36(1)(iii) of the Income Tax Act This section allows a deduction for the interest paid on capital borrowed for business purposes I he Assessing Officer did not dispute dial the loans were used wholly and exclusively for business purposes. Instead, the Officer primarily argued that the appellant lacked sufficient own funds and diverted interest-bearing funds for advancing interest-free loans. 4.3.13 As shown earlier, the appellant company uses a pool of funds from various sources, including own kinds (share capital, reserve and surplus) and....