TaxTMI 
TaxTMI 
2026 (5) TMI 1143
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.... to 0.25% instead of 0.5% as determined by the TPO. 3. The facts in brief are that, the assessee along with its subsidiary, M/s AA Infraproperties Pvt Ltd [in short 'AAIPL'] had extended corporate guarantee to IDPL, Sri Lanka in relation to the loans availed by the AE from Banks / FIs. The appellant had benchmarked the ALP fee rate of corporate guarantee at NIL, on the ground that it was a shareholder activity and the financial condition of IDPL had deteriorated significantly and therefore realizability of the CG fee was in doubt. The ld. TPO however disagreed with this plea of the assessee and benchmarked the arm's length fees of the corporate guarantee issued to IDPL, Sri Lanka at 0.5% by using the interest savings approach, and accordingly computed the TP adjustment at Rs. 1,40,46,577/-. 4. In the appellate proceedings, the ld. CIT(A) following the decisions rendered by the Hon'ble Bombay High Court and Madras High Court in the cases of CIT Vs Everest Kanto Cylinder Ltd reported in 58 taxmann.com 254&Pr.CIT Vs Redington (India) Ltd(430 ITR 298) rejected the assessee's plea that, the CG was a shareholder activity and held that adjustment was required to be made for guarante....
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....findings of the ld. CIT(A) in Para 5.4.3, as extracted above, holding that 50% of the ALP CG fee i.e. 0.25% was attributable to the assessee. We thus are not inclined to interfere with the order of the ld.CIT(A) on this issue and consequently, dismiss the ground nos. 1to 3 & 5 of the Revenue's appeal. 7. The issue raised in Ground No. 4 of the appeal is against the order of the ld. CIT(A) deleting the proportionate disallowance of interest paid on loans totalling to Rs. 67,87,32,949/- in relation to non-interest bearing loans & advances given to subsidiaries / associates viz., M/s AAIPL and M/s South City Anmol Infra Park LLP [in short 'SCA LLP']. 8. We first take up the issue relating to the proportionate interest disallowance of Rs. 65,23,89,517/- in relation to the loans advanced to AAIPL. The facts as noted in brief are that, the assessee had formed a subsidiary AAIPL for conducting real estate businesses in Sri Lanka and Dubai. The assessee had advanced loans to AAIPL, which in turn had advanced loans to foreign step-down subsidiaries IDPL, Sri Lanka and AAIML, Dubai. These loans carried interest ranging between 11% to 13.5% which were also serviced by AAIPL until FY 201....
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....y and give interest free advances to sister concern was held to be allowable u/s. 36(1)(iii) of the Act on the principles of commercial expediency. He thus does not want us to interfere with the order of ld. CIT(A). 11. We have heard the rival submissions and perused the material placed on record. It is seen that the impugned issue is no longer res integra. We find that the coordinate Bench in assessee's own case for AY 2020-21 (supra) has held that the assessee was able to demonstrate that the loans were advanced to AAIPL for business purposes and therefore, even if these loans did not yield any interest income, yet the interest paid on borrowings was an admissible deduction u/s. 36(1)(iii) of the Act. The relevant findings of this Tribunal were as under:- "5. The assessee challenged the said order before the Ld. CIT(A) who allowed the appeal of the assessee and inter alia directed the AO to delete the disallowance of interest of Rs. 46,27,18,547/-. The relevant portion read as under: "6.3.4. I have considered the facts of the case and the submissions placed on record. It is noted that the assessee is engaged in the business of development of real estate. The ....
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....l crisis and having regard to the extra ordinary COVID situation, and taking note of the fact that IDPL did not have revenues to service the loan availed from AAIPL, the management of the appellant considered it prudent to not charge interest from AAIPL until the financial health and situation of IDPL improved. I, therefore, note that the appellant had indeed substantiated the financial hardship and disputes being faced by AAIPL & IDPL which lead the appellant, being the parent company, to offer financial support in the form of waiver of interest payable on the loan so advanced. 6.3.5 With regard to the observation of the AO that, since AAIPL had received interest income from IDPL, there was no commercial rationale for the appellant to have waived the interest, it is noted from the facts that this observation was factually erroneous. From the financials of AAIPL placed on record, it is noted that AAIPL had simply credited interest income on the loan advanced to AAIPL by way of book entry against which an equivalent amount of provision for bad and doubtful debt was also created in the books of accounts. AAIPL is noted to have not actually received any interest from IDPL and....
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....preme Court however held that the authorities below had approached the matter from an erroneous angle. According to the Apex Court, both for the purposes of section 37 as well as 36(1)(ii) of the Act, the expression "for the purposes of business" had to be considered and interpreted from the view point of "commercial expediency" and for that purpose it was wholly immaterial if a third party also benefitted. The relevant findings of the Supreme Court are reproduced below: "That the borrowed money is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits. Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having rega....
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....y the assessee to the effect that it would provide additional margin to M/s. Hero Fibres Limited to meet the working capital for meeting any cash loses. 15. It would also be significant to mention at this stage that, subsequently, the assessee company had off-loaded its shareholding in the said M/s. Hero Fibres Limited to various companies of Oswal Group and at that time, the assessee company not only refunded back the entire loan given to M/s. Hero Fibres Limited by the assessee but this was refunded with interest. In the year in which the aforesaid interest was received, same was shown as income and offered for tax. 16. Insofar as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the Bank account when the said advance of Rs. 34 lakhs was given. Remarkably, as observed by the CIT (Appeal) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilise those funds for giving advance to its Directors. 17. On the basis of aforesaid discussion, the present appeal is allowed, thereby setting aside the order of the....
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....e company viz., IFHC, by way of acquisition of equity stake. The said acquisition was funded by interest bearing borrowings. The AO disallowed the interest paid thereon holding it to be in the capital field. On appeal, the Hon'ble High Court noted that the assessee had acquired the said finance company so as to make funds readily available when required for development of a housing project or to fund any acquisition of real estate, and therefore it held that the investments were for expansion of the assessee's existing real estate business. The Hon'ble Gujarat High Court thus upheld the orders of the lower authorities, allowing the deduction for interest u/s. 36(1)(iii) of the Act. 6.3.11 It is noted that similar facts and circumstances were also involved in the decision rendered by the Hon'ble ITAT, Kolkata in the case of S.P. Jaiswal Estates (P.) Ltd. (140 ITD 19). In the instant case also, the assessee had advanced interest free loans to its subsidiary company which was to undertake real estate project in Goa. According to the assessee, the loan was advanced in furtherance of existing business of real estate and therefore, on the principles of c....
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....nterest paid on such loan was disallowed by the AO u/s. 36(1)(iii) of the Act. On appeal, the Hon'ble Tribunal, while relying on the Supreme Court decisions in the case of S.A. Builders Ltd vs CIT(A) (supra) and Hero Cycles (P.) Ltd vs CIT (supra), and the decision of the Hon'ble Madras High Court in the case of RPG Transmissions Ltd (supra), held that the test of commercial expediency was proven in the instant case beyond doubt and, hence, the interest paid on borrowed capital was to be allowed. 6.3.13 In the given facts of the present case also, it is observed that the appellant had advanced loans to AAIPL in the course of and for the purposes of business and it has demonstrated that the loans so advanced and the interest waiver given were based on commercial prudence. Hence, following the judicial precedents (supra), it is held that the interest expense incurred on the borrowings which were used in relation to the advancement of loans to the subsidiary was for the purposes of business and therefore allowable as deduction u/s. 36(1)(iii) of the Act. The disallowance of Rs. 46,27,18,547/- made by the AO is, therefore, held to be unsustainable, both on facts and in law....
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....ts and material placed before us that the principal reason for not charging interest from AAIPL was cropping up of serious litigation between the assessee which held 87.5% in AAIPL with the other shareholder Mr. JH who held 12.5%. The assessee is noted to have taken legal steps to protect its interest in its subsidiaries and the details of litigation are available at Pages 187 to 271 of the paper book. Having gone through the same, it is noted that, during the financial year 2019- 20, the litigations had not been resolved which continued till financial year 2021-22 and during the intervening period Mr. JH was in control of both the foreign subsidiaries as on 31.03.2020 due to which neither the assessee nor AAIPL had access to their books of accounts or control over them. We also note that appropriate disclosures in this regard were also made by the assessee in its Note Nos. 38 to 41 of the audited financial statements a copy of which is available at Page 67 of Paper Book. Having considered these facts and circumstances, we find merit in the Ld. CIT(A)'s findings that, on the given facts, it was commercial prudence that, the AAIPL would not be able to realize interest from the f....
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....s also created in the books of accounts. 16. On the next argument of Ld. DR proposing to tax interest income receivable from AAIPL, if the deletion of interest disallowance is upheld, we agree with the Ld. AR that, this was not the case of the AO himself. The undisputed facts, as discussed above, are that, the assessee did not charge interest from AAIPL. The AO had accordingly disallowed proportionate interest corresponding to such non-interest bearing loans given to AAIPL and no addition was made on account of interest income. Hence, we do not find any merit in the Ld. DR's contention in trying to make out a completely new case which is not the issue before us. For the above reasons, we thus uphold the Ld. CIT(A)'s finding that, the loan was advanced by assessee to AAIPL for business purpose and that the action of not charging interest during the relevant year was driven by commercial and business considerations. In light of these findings, the next issue to be answered is whether since the assessee did not charge interest on loans given to subsidiary for business purposes, the corresponding proportionate interest paid on borrowings is to be disallowed. In this re....
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....s out of which loans were advanced by the assessee to its subsidiary company on which no interest was charged. The AO had disallowed the corresponding interest expenditure u/s. 36(1)(iii) of the Act. On appeal, the Hon'ble Apex Court observed that, the advance to subsidiary company had become imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to subsidiary company to meet the working capital for meeting any cash losses. The Hon'ble Apex Court accordingly held that, once it is established that there is nexus between the expenditure incurred and the purpose of business (which need not necessarily be the business of the assessee itself), the tax authorities cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. The Hon'ble Court further held that no businessman can be compelled to maximize his profit and that the revenue authorities must put themselves in the shoes of the assessee a....
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....dinate Bench is also supported by the decision of the Hon'ble Supreme Court in the case of Sharp Business System (supra) as well. In the decided case also, the assessee had utilized interest bearing borrowings to advance interest free loans to sister concern and make investments in subsidiary, which the AO disallowed u/s. 36(1)(iii) of the Act. On appeal, the Hon'ble Supreme Court following their earlier judgment in SA Builders Ltd. (supra) held that, the purpose for which the advances were made to the sister concern would be covered by the principle of commercial expediency and thus affirmed the order of the Tribunal allowing the claim of interest u/s. 36(1)(iii) of the Act. 13. Respectfully following the above decisions (supra), we are not inclined to interfere with the order of ld. CIT(A) deleting the interest disallowance made in relation to the loans advanced to AAIPL. 14. Next, we come to the issue involving proportionate interest disallowance of Rs. 2,63,43,432/- in relation to the non-interest bearing advances given to SCA LLP. The facts as noted are that, SCA LLP was incorporated in 2010 to undertake business of real estate development. It is observed that, the asses....
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....and the share of the Developer, SCA LLP was 70.21%. At that material time, the appellant is noted to have separately advanced loans to the Developer, SCA LLP, for which it was charging interest. During the relevant AY 2021-22, the appellant has pointed out that, it was optimistic about the prospects of the real estate project being undertaken by SCA LLP and therefore had obtained majority stake in SCA LLP vide supplementary LLP agreement along with other partners, M/s Bantala Properties (P) Ltd and M/s Monarch Shelter (P) Ltd dated 01.03.2021.Having perused the same, it is noted that the appellant had indeed become the majority partner in SCA LLP in the relevant FY 2020-21 and the appellant was entitled to profit share of 69%. Overall therefore, the appellant is noted to be entitled to partner's share of 48.44% (69% of 70.21%) in revenues and further revenues of14.82% in the capacity of land owner, taking its overall revenue's share to 63.26%.These material facts are noted to show that, there was a material change in factual position from the earlier AY 2020-21 viz., from being a land owner in a Development Agreement with the LLP, the appellant had become majority partner in the LL....
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....298 ITR 194).The Hon'ble Court has explained that, the expression 'for the purpose of business' occurring in section 36(1)(iii) indicates that once the test of 'for the purpose of business' is satisfied in respect of the capital borrowed, the assessee would be entitled to deduction under section 36(1)(iii) of the Act. On the given facts of the present case, the advances given to SCA LLP are noted to have been advanced for the purposes of business and therefore the proportionate interest cost, if any, relatable to such advances was allowable u/s. 36(1)(iii) of the Act. In this regard, I find that the ratio decidendi laid down by the Ld.CIT(A), NFAC in appellant's own case for earlier AY 2020- 21(supra) while deleting the disallowance of proportionate interest relatable to non-interest bearing loans given to AAIPL, is squarely applicable in the context of SCA LLP as well. Hence, the AO's action of disallowing proportionate interest in relation to loans advanced to SCALLP is held to be unjustified as well." 16. The ld. DR appearing for the Revenue submitted that, there was no logical explanation given by the assessee for not charging interest on loans to SCA LLP dur....
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....sessee had originally entered into a development agreement with SCA LLP for development of an industrial park in Howrah on land parcels co-owned along with other land owners, in terms of which the assessee was entitled to 14.82% share of revenues. The undisputed fact is that, the assessee had subsequently acquired the majority stake in SCA LLP viz., 69% thereby making the LLP its sister/group concern and taking the overall revenue share of the assessee upto 63.26%. We find that, upon becoming the majority partner and exercising control over the management of the LLP, the assessee who had earlier advanced loans to the LLP stopped charging interest since the project was faced with delays and the fixed interest costs would severely affect the financial health of the LLP. Moreover, it is observed that, the assessee was directly entitled to share of revenues as well as profits of the LLP and therefore the opportunity cost of foregone interest was corresponding offset by increased share of revenues/profits from the LLP. The case of the assessee is found to be ably supported by the decisions of Hon'ble Supreme Court in the cases of SA Builders Ltd (supra), Sharp Business Systems (supa) & ....