2017 (12) TMI 1560 - HC - Income Tax

Disallowance of interest on interest bearing advances to subsidiary companies - Held that - This Court in the CIT v. Reliance Utilities & Power Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT) has held that where both interest free and interest bearing funds are available then a presumption would arise that the investment would have been made first by an Assessee out of the interest free funds available. This presumption would apply in the present case also. Thus no occasion to disallow proportionate interest paid on the amounts borrowed by the Respondent in proportion to the investment in its subsidiary companies can arise. Accordingly, question no.1 does not give rise to any substantial question of law as the issue stands concluded against the revenue by the decision of the Apex Court in S.A. Builders Ltd. (2006 (12) TMI 82 - SUPREME COURT) and of this Court in the case of Reliance Utilities & Power Ltd. (supra). Thus question (a) is not entertained. Disallowance u/s 14A r.w.r. 8D - Held that - It is an admitted position between the parties that issue raised herein stands concluded in favour of the Respondent by the decision of this Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT 2010 (8) TMI 77 - BOMBAY HIGH COURT . In the above case this Court has held that Rule 8(b) of the Income Tax Rules would apply with effect from Assessment Year 2008-2009 and prior thereto the disallowance for expenditure under Section 14A of the Act has to be done on reasonable basis. In this case the CIT (A) has made a reasonable disallowance of 5% of exempt income.

Summary

Issues:
1. Disallowance of interest on advances to subsidiary companies
2. Disallowance under section 14A of the Income Tax Act, 1961

Issue 1: Disallowance of interest on advances to subsidiary companies

The Assessing Officer disallowed interest paid by the Assessee on funds advanced to subsidiary companies. The CIT (A) found the investment in subsidiaries without charging interest was due to commercial expediency and allowed the appeal. The Tribunal upheld the decision, stating the Assessee had surplus interest-free funds to cover the investments. The Tribunal relied on the S.A. Builders case and dismissed the Revenue's appeal. The Revenue contended that the impugned order did not detail the business interest the Assessee had in its subsidiaries. The High Court noted that as a holding company, the Assessee naturally had an interest in its subsidiaries' success. Referring to the S.A. Builders case and the Reliance Utilities & Power Ltd. case, the Court held that having excess interest-free funds and making investments from such funds did not warrant disallowance of interest expenditure. The Court concluded that no substantial question of law arose, as the issue was settled by precedent cases. Therefore, question (a) was not entertained.

Issue 2: Disallowance under section 14A of the Income Tax Act, 1961

The Court noted that the issue was settled in favor of the Respondent by the Godrej & Boyce Mfg. Co. Ltd. case. The Court held that Rule 8(b) of the Income Tax Rules applied from Assessment Year 2008-2009, and prior to that, disallowance under Section 14A had to be reasonable. The CIT (A) had made a reasonable disallowance of 5% of exempt income. The Court found no substantial question of law as the issue was decided against the Revenue in the Godrej & Boyce Mfg. Co. Ltd. case. Consequently, question (b) was not entertained.

In conclusion, the High Court dismissed the appeal, citing no substantial questions of law in either issue. No costs were awarded.