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2012 (6) TMI 623 - AT - Income TaxDeduction of interest - Investment of interest free funds - commercial expediency - held that - it is clear that no interest bearing funds were utilized by the assessee for the purpose of subscribing to the share capital of its subsidiary company. So long as the interest bearing funds are used for the business purpose, whether for investment in fixed or circulating capital, the amount of interest shall be allowed as deduction. If answer to stage (a) turns out to be in negative, only then the question of examining the stage (b) arises as to whether investment for non-business purpose was made out of interest free funds. If such investment for non-business purposes is out of interest free funds, then there cannot be disallowance of interest and vice versa. The second stage arises for consideration on the assessee s failure to succeed in the first. As in the instant case, the assessee failed to amply prove the business purpose in terms of S.A. Builders Ltd. 2006 (12) TMI 82 (SC) , but succeeded in proving that interest free funds were utilized for subscribing to the share capital of its subsidiary company, in my considered opinion the addition cannot be sustained. - Decided in favor of assessee. - Third member bench decision.
Issues Involved:
1. Disallowance of Interest Expenditure 2. Interest Charged under Sections 234B and 234C Detailed Analysis: 1. Disallowance of Interest Expenditure Facts and Background: The assessee, engaged in manufacturing and trading of industrial chemicals, filed a return declaring a total income of Rs. 7,00,68,875/-. The Assessing Officer (A.O.) noted that the assessee claimed interest expenses amounting to Rs. 4,72,07,891/-. The A.O. observed that the funds amounting to Rs. 16,66,31,589/- were utilized by the assessee as share application money for making investments in shares, which the A.O. considered as capital expenditure providing enduring benefits. Consequently, the A.O. disallowed Rs. 3,22,23,048/- out of the total interest expenditure. Assessee's Argument: The assessee argued that the investments were made out of surplus funds and fresh capital infusion, not from borrowed funds. It was also contended that the funds were used for commercial expediency and that the interest capitalized amounting to Rs. 1,54,34,285/- should be excluded from the disallowance. CIT(A) Decision: The CIT(A) accepted the exclusion of the capitalized interest but did not agree with the assessee's claim that the investments were made out of non-interest-bearing funds. The CIT(A) directed the A.O. to recompute the disallowance after excluding the capitalized interest, resulting in a partial relief. Tribunal's Decision: The Tribunal, after considering the rival submissions, noted that the A.O. erroneously considered investments from previous years for the disallowance calculation. The Tribunal directed the A.O. to restrict the disallowance to the funds utilized in the current assessment year, i.e., Rs. 2.68 crores + Rs. 5.71 lakhs. The Tribunal also restored the issue to the A.O. to verify if these investments were made out of interest-free funds and to consider the commercial expediency claim. Separate Judgment by Accountant Member: The Accountant Member dissented, emphasizing that the assessee had sufficient interest-free funds to cover the investments. Citing the case of Reliance Utilities & Power Ltd., it was argued that when both interest-free and borrowed funds are available, it is presumed that investments are made out of interest-free funds. The Accountant Member concluded that no disallowance should be made as the investments were presumed to be from interest-free funds. Third Member's Decision: The Third Member agreed with the Accountant Member, stating that the assessee had sufficient interest-free funds to cover the investments. The Third Member also noted that the commercial expediency of investing in a wholly-owned subsidiary was implicit, as per the Supreme Court's decision in S.A. Builders Ltd. Consequently, the disallowance of Rs. 2,57,94,775/- was deleted. 2. Interest Charged under Sections 234B and 234C Facts and Background: The assessee also challenged the interest charged under sections 234B and 234C of the Income-tax Act. Tribunal's Decision: The Tribunal directed the A.O. to recompute the interest under sections 234B and 234C after reworking the total income, as the interest charges are consequential to the total income assessed. Conclusion: In conformity with the majority view, the Tribunal allowed the appeal, directing the deletion of the disallowance of Rs. 2,57,94,775/- and the recomputation of interest under sections 234B and 234C based on the revised total income.
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