2016 (8) TMI 1349 - AT - Income Tax

Addition u/s 36(1)(iii) - assessee submitted that the said amount has been invested in the group companies in the larger interest of assessee for business expediency- Held that - The total of non interest bearing funds as available with the assessee are to the tune of ₹ 84,82,25,180/- against which the assessee had invested as non interest bearing investments to the tune of ₹ 72,28,15,197/-. Therefore, non interest bearing funds are more than non interest bearing investments. Further we find that assessee has declared more interest income on fixed deposits than the interest paid by him on interest bearing funds. In view of the facts and circumstances, it cannot be said that assessee had deployed interest bearing funds into non interest bearing investments. Assessee is a sole proprietor of M/s Modern Publishers and is also a majority shareholders in the companies in which interest free investments has been made. Paper Book page 12 is the list of companies in which the assessee is a holding a major chunk of shares. The rest of the shares are also held by other family members of the assessee. From the above chart it can be safely concluded that assessee is a major shareholder and therefore the advances/investments made by assessee in these companies cannot be said to be without commercial expediency. There would be a direct benefit to the assessee if the interest free investments made in these companies results into more profits to these companies and indirectly to the assessee - Decided in favour of assessee.

Summary

Issues:
Appeal against confirmation of addition under section 36(1)(iii) of the Act by learned CIT(A) for Asst. Year: 2010-11.

Analysis:
The appeal was filed against the order of the learned CIT(A) confirming an addition of ?2,39,10,531/- made by the Assessing Officer under section 36(1)(iii) of the Act. The Assessing Officer observed that the assessee had invested ?72,28,15,197/- in related concerns without charging any interest. Consequently, the Assessing Officer questioned the claim of bank interest amounting to ?2,39,01,531/- as expenses in the P&L Account, leading to a show cause notice under section 36(1)(iii) of the Act.

The assessee contended that the investments were made in group companies for business expediency and therefore, the disallowance was unwarranted. However, both the Assessing Officer and the learned CIT(A) relied on precedents such as the decision of the Hon'ble Punjab and Haryana High Court in CIT Vs. Abhishek Industries to uphold the disallowance under section 36(1)(iii) of the Act.

During the appeal hearing, the appellant argued that the net impact of interest-bearing loans and fixed deposits showed that the assessee earned more interest income than paid to banks, indicating commercial expediency. The appellant also highlighted the reversal of the judgment in the case of M/s Bright Enterprises Pvt. Ltd. by the Hon'ble Punjab & Haryana High Court, along with a favorable decision in a similar case involving a group company.

The Tribunal noted that the reliance on the judgment of Bright Enterprises (P) Ltd. by the learned CIT(A) was incorrect, as it had been reversed by the Hon'ble Jurisdictional High Court. Additionally, the Tribunal referred to the overruling of the judgment in the case of Abhishek Industries by the Hon'ble Supreme Court in Hero Cycles vs. CIT, emphasizing the commercial expediency of advancing loans within group companies.

The Tribunal found that the non-interest bearing funds exceeded the investments in group companies without charging interest, demonstrating commercial expediency. Moreover, as the assessee was a major shareholder in the companies, the investments were deemed to have commercial justification, leading to a direct benefit if the investments resulted in increased profits.

Considering the facts, circumstances, and legal precedents, the Tribunal allowed the appeal filed by the assessee, thereby overturning the addition made by the Assessing Officer and confirmed by the learned CIT(A).

In conclusion, the Tribunal's decision was based on the commercial expediency of the investments made by the assessee in group companies, supported by the analysis of interest-bearing funds, non-interest bearing funds, and the shareholding structure of the companies involved.