2012 (5) TMI 160 - HC - Income Tax

Interest free advances Revenue contested that Tribunal held that funds available with the Assessee are much more than the amount invested in its subsidiary even though the sources of funds without considering secured loans are not sufficient for the application of funds - the Assessee does not have its own funds for making investment in the subsidiary or for advances and therefore borrowed funds have been utilized and interest on a pro rata basis has been rightly disallowed by the Assessing Officer Held that - The assessee has significant interest in the business of the subsidiary since both the assessee and the subsidiary are engaged in providing telecommunication services and utilizes even borrowed money for furthering its business connection, there is no reason or justification to make a dis allowance in respect of the deduction which is otherwise available under Section 36(1)(iii) - when the assessee advanced an amount to RIL for furthering the business of the assessee it in turn was to execute counter guarantees in favour of financial institutions for the benefit of the discharge of the EPCG obligations by the assessee the findings of Tribunal are consistent with the judgment of the Supreme Court in S.A. Builders v. Commissioner of Income Tax (Appeals) (2006 -TMI - 2870 - SUPREME COURT OF INDIA)that if the business purpose is there while advancing money to the sister concern the dis allowance of interest cannot be sustained - against revenue.

Issues Involved:
1. Justification of the Tribunal's holding regarding interest-free funds and their sufficiency for investments and advances.
2. Applicability of the ruling in S.A. Builders v. Commissioner of Income Tax (Appeals) to the present case.

Issue-wise Detailed Analysis:

1. Justification of the Tribunal's Holding Regarding Interest-Free Funds:
The Revenue challenged the Tribunal's decision, which held that the interest-free funds available to the assessee were sufficient for the investments in Reliance Infocomm Limited and advances to Reliance Industries Limited. The Assessing Officer (AO) had disallowed Rs. 15.76 crores of interest on the basis that the assessee had not satisfactorily proved that the investments and advances were made from non-interest-bearing funds. The AO's calculations showed a discrepancy between the sources of funds and their application, leading to the conclusion that interest-bearing funds were used for non-interest-yielding investments.

The CIT(A) reversed this decision, stating that the assessee had sufficient interest-free funds and that the investments and advances were for business purposes. The Tribunal affirmed this finding, noting that the AO had not considered the debenture application money of Rs.1104 crores refunded/adjusted against fresh investments in Reliance Infocomm Ltd. during the year. The Tribunal found no infirmity in the CIT(A)'s working and upheld that the interest-free funds were more than sufficient for the investments and advances.

2. Applicability of the Ruling in S.A. Builders v. Commissioner of Income Tax (Appeals):
The Revenue also contended that the Tribunal erred in applying the Supreme Court's ruling in S.A. Builders, where it was held that if the business purpose is present, the disallowance of interest cannot be sustained. The AO had relied on the judgment in Phaltan Sugar Works Ltd., which was overruled by the Supreme Court in S.A. Builders.

In S.A. Builders, the Supreme Court held that the test for allowing interest on borrowed funds is whether the expenditure was for commercial expediency. The Court noted that even if borrowed funds were used, the deduction should be allowed if the funds were used for business purposes. The CIT(A) and the Tribunal found that the investments in Reliance Infocomm Ltd. and advances to Reliance Industries Ltd. were commercially expedient and for the purpose of the assessee's business. The Tribunal noted that the investments ensured the utilization of the assessee's infrastructure and furthered its business prospects, while the advances to Reliance Industries Ltd. were for obtaining guarantees necessary for the assessee's business operations under the EPCG Scheme.

Conclusion:
The High Court upheld the Tribunal's decision, affirming that the interest-free funds were sufficient for the investments and advances. It also confirmed that the investments and advances were for the purpose of business, aligning with the principles laid down in S.A. Builders. The Court concluded that the disallowance of interest was not justified, and the appeal by the Revenue was dismissed.

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