AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2023 (2) TMI 1434
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....ney advanced was for business interest of its of subsidiary, the holding company should ordinarily be allowed the benefit of deduction under Sec.36(1)(iii) unless there is material in the possession of the Assessing Officer to the effect that the money advanced was utilised by the subsidiary for nonbusiness purposes. (CIT Vs KEC International Ltd - Madras High Court in TCA 113/2009 dated 02/12/2019) 2.3 The CIT(A) failed to appreciate that the Assessing Officer is not within his limits to suggest to the assessee as how to manage its affairs and that the assessee is entitled to make better use of its resources in the best interest of its business. 2.4 The Assessing Officer and the CIT(A) have failed to appreciate that the strategic investment by the assessee company with its subsidiary lead to improved financial results of the subsidiary in the following years fetching substantial revenue to the exchequer by way of taxes and also enhanced the value of assessee's investments and hence the observation of the Assessing Officer and the CIT(A) that there was no commercial expediency could be treated to be contrary to facts and deserve to be discounted. For ....
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....terest bearing funds for non-business purposes. In response, the assessee submitted that investment made in subsidiary companies is out of commercial expediency and the assessee has derived substantial business advantage. Therefore, merely for the reason of using interest bearing funds for investments, interest cannot be disallowed. 7. The AO, however, was not convinced with the explanation furnished by the assessee and according to the Assessing Officer, the assessee could not establish business expediency in investment with subsidiary companies and therefore, by following certain judicial precedence worked out notional interest @ 12.7% on investments made in subsidiary companies and made addition of Rs. 97,18,008/- u/s. 36(1)(iii) of the Act. The relevant findings of the AO are as under: "6.4 I have considered the above submissions of the assessee and the Judicial decisions relied upon by the assessee. The major issue involved in all the above cases was regarding the availability of surplus funds and interest free funds with the assessee and lack of nexus between the borrowed funds & interest free loans & advances given and therefore the Courts have held that the inte....
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....e assessee has received share application money to the tune of Rs. 3.73 crores as at 31.03.2010. It is also seen that the assessee has incurred heavy loss of rs.21.61 Crores during the year as compared to 8.46 Crores as at 31.03.2009. 6.6 The Hon'ble Kerala High Court in the case of CIT V. Harrisons Malayalam Ltd. (210 Taxman 115 dt. 03/08/20 12) has dealt with the issue of allowability of the interest paid in respect of loans and advances given to subsidiary concerns. In the said decision, the Hon'ble High Court has also discussed the decision of the Supreme Court relied upon by the assessee. While addressing the issue of assessee's claim that loans to subsidiary Companies were from its internal resources, the Hon'ble Court has held that if such interest free loans were not made, then at least the assessee need not have borrowed from other entities for meeting its day-to-day expenses. The Hon'ble High Court has held that the interest paid on such funds could not be claimed as business expenditure. the case of the assessee as discussed above that they have paid huge interest of Rs. 17,81,86,171 /-. Since the loans and advances & investments hav....
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....d availed loan at an average rate of 12.7% interest as observed by the AO. The AO disallowed Rs 97,18,008 being 12.7% of the said loans and advances 11. As per provisions of section 36(1)iii) of the Act, the interest on loans raised by the appellant for business purposes is available as a business deduction. If the appellant claims deduction in terms of section 36 for the purpose of computation of income referred to in section 28, it is incumbent on the appellant to place materials in support of its claim. Section 36(1)(iii) of the Act relates to amount of interest paid on capital borrowed for the purposes of the business, profession or vocation. The appellant is required to satisfy the AO that it is entitled to obtain deduction in accordance with the provisions. If, in the process of examination of genuineness of such deduction, it transpires that the appellant advanced certain funds to sister concerns without charging interest, onus on the appellant is heavy inasmuch as there was justification to lend interest free loan to sister concern that in spite of outstanding loans on which the appellant is incurring liability to pay interest. 12. The Hon'ble Apex Cou....
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....estments were made in the form of share. The AO per contra, pointed out that the appellant did not give any such convincing reasons for granting interest free loans to its group companies, apart from a generalized statement that the loan was given in the context of common management, unity and control. It is not the case of the appellant that it utilized its borrowed capital for strategic business purposes with a view to strengthening and promoting its existing business by combining different business segments as the AO has observed that the appellant could not furnish as to how the advances made to M/s Trimax Sands that was incorporated for the purpose of setting up of a project could be construed as commercially expedient. In the circumstances, the appellant is not entitled to the benefit of the ratio laid down in the case of S.A. Builders(supra) by simply accepting the submission of the assessee. Accordingly, the interest expenditure incurred by the appellant that have been claimed u/s 36(1)(iii) is not allowable. 14. I am thus of the view that once it is borne out from the record that the appellant had borrowed certain funds on which liability to pay interest is being ....
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....d. 11. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The provisions of section 36(1)(iii), deals with deduction towards interest paid on borrowed capital. As per said provision, if interest paid on borrowed capital is not utilized for the purpose of business, then same cannot be allowed as deduction. In this case, the AO disallowed proportionate interest paid on borrowed capital for the reason of diversification of interest bearing funds to group companies for non-business purpose. According to the AO, the assessee could not establish nexus between investment with subsidiary companies and business exigency. It was the explanation of the assessee before the AO that the assessee had made investment with group companies/subsidiary companies to derive substantial business advantage. The assessee, further claimed that once there is a business exigency in investment made with subsidiary companies, then the question of disallowance of interest u/s. 36(1)(iii) of the Act, does not arise. 12. Having heard both the sides and considered relevant material available on record, we find that the assessee has made inve....