2019 (2) TMI 1912 - AT - Income Tax

Disallowance of interest expenditure u/s 36(1)(iii) - assessee company has used the borrowed funds for non-business purpose - CIT-A deleted addition - HELD THAT - Since the facts of the instant case are identical to the facts of the case decided by the Tribunal in assessee s own case for assessment years 2007-08 and 2010-11 2019 (1) TMI 992 - ITAT DELHI , therefore, in absence of any contrary material brought to our notice against the order of the Tribunal and considering the fact that the own capital and free reserves are substantially higher than the investments, we find no infirmity in the order of the CIT(A) deleting the disallowance made by the Assessing Officer u/s 36(1)(iii). We, therefore, uphold the order of the CIT(A) and the grounds raised by the Revenue are dismissed.

Summary

Issues Involved:
1. Disallowance of interest expenditure under Section 36(1)(iii) of the Income Tax Act.
2. Utilization of borrowed funds for non-business purposes.
3. Adequacy of interest-free funds for investments.

Detailed Analysis:

Disallowance of Interest Expenditure under Section 36(1)(iii):
The primary issue revolves around the disallowance of ?9,07,57,000/- as interest expenditure under Section 36(1)(iii) of the Income Tax Act. The Assessing Officer (AO) disallowed this amount on the grounds that the borrowed funds were not utilized for business purposes but were instead invested in mutual funds and other deposits. The AO argued that the funds used for these investments could have been used to repay loans, thus saving substantial interest expenses.

Utilization of Borrowed Funds for Non-Business Purposes:
The AO's contention was that the assessee company, engaged in the business of transmission of electricity, had raised substantial loans and paid significant interest on these loans. However, these borrowed funds were allegedly utilized for investments in mutual funds and other deposits, which did not generate any income during the year. The AO held that since the funds were not used for the business purposes of the company, the interest paid on these funds could not be allowed as an expenditure.

Adequacy of Interest-Free Funds for Investments:
The assessee argued that the investments in mutual funds and Fixed Deposit Receipts (FDRs) were made from its own funds and not from borrowed funds. It was substantiated that the own capital and free reserves as on 31.03.2012 were ?50,583.66 lakhs, which was much higher than the total investment of ?12,924.00 lakhs. The assessee relied on various judicial decisions, including the Hon'ble Bombay High Court's decision in CIT vs. Reliance Utility & Power Ltd., which held that if interest-free funds were sufficient to make the investment, a presumption would arise that the investment was made out of interest-free funds.

Findings of the CIT(A):
The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance made by the AO, following the decision in the assessee's own case for the assessment year 2010-11. The CIT(A) observed that the borrowed funds were used for business purposes and the investments in mutual funds were made from the assessee's own funds. The CIT(A) also noted that the assessee had sufficient interest-free funds to cover the investments.

Tribunal's Decision:
The Tribunal upheld the order of the CIT(A) and dismissed the appeal filed by the Revenue. The Tribunal noted that the facts of the instant case were identical to those in the assessee's own case for the assessment years 2007-08 and 2010-11, where the Tribunal had decided in favor of the assessee. The Tribunal emphasized that the assessee had adequate interest-free funds for making the investments and that the borrowed funds were used for business purposes. The Tribunal also considered the contractual restrictions and potential liquidation damages/pre-payment charges, which made it imprudent for the assessee to use borrowed funds for non-business purposes or to make pre-payments.

Conclusion:
The Tribunal concluded that there was no case for disallowance of interest under Section 36(1)(iii) of the Income Tax Act, as the borrowed funds were used for business purposes and the investments were made from the assessee's own funds. The appeal filed by the Revenue was dismissed, and the order of the CIT(A) was upheld. The decision was pronounced in the open court on 08.02.2019.