TaxTMI 
TaxTMI 
2025 (6) TMI 697
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....on 14A of the Act and addition of Rs. 9,92,70,233/- on 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 ....
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....in the commercial expediency of giving loans." 2. In response to the above question assessee made the following 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....
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....3.4 The facts of the case are as under: 1. As per the balance sheet for the year ending on 31.03.2018 the availability of funds and utilization of funds in ICDs/investments/loans extended 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 ....
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....r kind notice that in show cause the availability of funds has been calculated only by taking into account the amount of share capital at Rs. 342.75 Crore and Reserve and Surplus at Rs. 18.26 Crore, the amount of interest free loan from subsidiary at Rs. 112.09 Crore has not been considered Even as 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....
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.... 49950000 11 Aggarwal Meadows Pm Ltd" 51343448 1040580 40580 52313448 12 HR Infracity Pvt. Ltd. 8027892 8027892 12 Robomech Software Pvt. Ltd. 5380000 5380000 13 Sunil Daga Khairnar 3335000 3335000 14 Ncopower Cure Energy Pvt. Ltd. 9000000 8999999 84181 8418 75764 16 Pratyaksh Diesel And Engines Pvt. Ltd. 3678073 43678073 34710000 385724 38572 4952849 17 Security Deposit 2320072 271000 100000 2491072 Total 242328573 57453431 43879379 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. Eve....
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.... 8. In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question." 2. (2009] 178 Taxman 135 (Bombay) High Court of Bombay Commissioner of Income-tax v. Reliance Utilities & Power Ltd. held that if there are funds available, both, interest-free and overdraft and/or loans taken, then a presumption would arise that investments would he out of interest-free funds generated or available with company, provided said funds arc sufficient to meet investments . The relevant extract of the order is as under: "9. Apart from that we have noted earlier that both in the order of the CIT(Appeals) as also the Appellate Tribunal, a clear finding is recorded that the assesses had interest- 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 in....
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.... "17. In a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interest-bearing funds) and payment is made, out of that mixed fund, the investment must be considered to have been made out of the interest free fund. To put it another way, in respect of payment made out of mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to make an estimation of a proportionate figure. For accepting such a proposition, it would be helpful to refer to the decision of the Bombay High Court in Pr. CIT v. Bombay Dyeing & Mfg. Co. Ltd. [IT Appeal No 1225 of 2015, dated 28-11-2017], where the answer was in favour of the assessee on the question, whether the Tribunal was Justified 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 result....
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....ring the year by issuance of shares. Thus, merely because the assessee had also raised loans or paid interest against loans that does not justify the disallowance. The investment in subsidiary and related entities has to be made for commercial purpose to earn future profits. It is not the case of revenue that investment were made in any entity not having any nexus with the principal object of assesses company. Hon'ble Supreme Court of India in South Indian Bank Ltd. vs. Commercial of Income Tax has held that if interest free own funds are available with the assesses or exceeds investment, investment would be presumed to be made out of assessee's own fund. Thus, the Bench is convinced that the disallowance was not justified the same deserves to be deleted. The relevant extracts of the ITAT order arc as under: "9. Ground no 2 and 2.1; Ld. Counsel of assesses relied 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. (20....
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.... the disallowance. The investment in subsidiary and related entities has to be made for commercial purpose to cam future profits. It is not the case of revenue that investment were made in any entity not having any nexus with the principal object of assessee company. The judgment of Hon'ble Supreme Court of India in South Indian Bank Ltd. Vs. Commissioner of income Tax (supra) also comes to the assistance of assessee where Hon'ble. Supreme Court recognized the principle that if interest free own funds are available with the assessee or exceeds investment, investment would be presumed to be made out of assesses's own fund. Thus, the Bench is convinced (hat the disallowance was not justified the same deserves to be deleted. The grounds are sustained. 13. Accordingly, the appeal is allowed and the to consequences shall follow the findings in regard grounds as stand determined in favour of 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....
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....under: "24. In our opinion, the High Court as well as the Tribunal and other income-tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and If It was, it should have been allowed. 25. The expression "commercial expediency" is an expression of wide import and includes such expenditure, as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency. 26. No doubt as held in Madhav Prasad Julia's case (supra), if the borrowed amount was donated fin some sentimental or personal reasons and not on the ground 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 ....
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....t look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 35. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances if to a sister concern It all depends on the facts and circumstances of the respective ease For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously if cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here) However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ....
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....de from the assessee's own funds. Since the appellant had sufficient own funds, interest-free loans are presumed to have been made from these funds Also, as held by the Hon'ble Supreme Court m S.A. Builders Ltd. vs. CIT (2007), interest-free loans given to subsidiaries as a measure of commercial expediency should be allowed. Commercial expediency is based on business prudence, which should not be questioned by the Assessing Officer. The appellant, being the best judge of its business, must prioritize expenditure and investment based on commercial expediency. Moreover, in this case, commercial expediency is not a significant issue since a small percentage of loans were interest-free and these loans were extended from the appellant's own interest-free funds. The Assessing Officer did not establish that interest-bearing funds were used for personal use or nun-business purposes. Therefore, the funds are considered to have been used wholly and exclusively for business purposes. The disallowance of interest paid amounting to Rs. 9,92,70,233/- is not sustainable However, the interest paid on TDS amounting to Rs. 14,774/- is not an allowable expenditure under Section 36(1)(iii)....