2019 (3) TMI 1921 - AT - Income Tax

Disallowance of interest u/s 36(i)(iii) - interest on the loans/advances made to subsidiary company should not be disallowed - HELD THAT - As funds sanctioned by the bank were utilized in other group companies on the direction of the holding company. These funds were not utilized for any purpose of the object of the assessee company - exclusive utilisation of these funds were not for the purpose of the assessee s business and the expenditure of interest is not for the purpose of assessee s business and clearly for the purpose of other group companies. Coming to the question of business expediency in this transaction, any act carried out for the purpose of its own business or carried out for the benefit of the subsidiary as a share holder can be referred to as business expediency. In the given case, the assessee is in the business of consultancy and no business commitment to fund other sister concern and the action of the assessee to fund step down subsidiary will not fit into representing any share holder commitment. The actual share holders are the holding company, any holding company diverting its own funds to the subsidiaries will fit into business expediency as held in the case of SA Builders 2006 (12) TMI 82 - SUPREME COURT - The assessee company was used as a source for funding the step down subsidiaries and the cost should also be transferred to the subsidiary who has utilized the funds and the burden of cost of funds on the assessee is unwarranted, may be beneficial to the overall group but not on the assessee. It clearly indicates that the transaction of funding the sister companies are not exclusively for the purpose of assessee s business. Therefore, the ground raised by the assessee is dismissed. Disallowance u/s 14A - CIT(A) deleted the disallowance on the ground that no interest was incurred on the share capital invested and also assessee did not receive any dividend income - HELD THAT - The Hon ble Delhi High Court in the case of Cheminvest Ltd 2015 (9) TMI 238 - DELHI HIGH COURT has held that section 14A will not apply where no exempt income is received or receivable during the relevant assessment year. Following the said decision, we find no infirmity in the order of CIT(A) in deleting the disallowance made by the AO u/s 14A of the Act. Accordingly, the ground raised by the revenue on this issue is dismissed.

Summary

Issues:
Cross appeals against CIT(A) order for AY 2012-13: Disallowance of interest u/s 36(1)(iii) and u/s 14A.

Analysis:
1. Disallowance of Interest u/s 36(1)(iii):
The AO disallowed interest of &8377; 7,38,83,333/-, observing the assessee availed interest-bearing funds/loans and advanced interest-free funds to subsidiaries. The AO rejected the explanation that loans were raised for investments, disallowing interest attributable to investments. CIT(A) upheld the disallowance, citing lack of commercial expediency in fund diversion to subsidiaries. The Tribunal noted the parent-subsidiary relationship, fund flow, and business activities, concluding the interest disallowance was justified due to funds not utilized for the assessee's business.

2. Disallowance u/s 14A:
The AO computed a disallowance u/s 14A despite no exempt income, relying on a circular. The CIT(A) deleted the disallowance as no interest was incurred on share capital and no dividend income was received. Citing a Delhi High Court decision, the Tribunal upheld the CIT(A) order, dismissing the revenue's appeal. The absence of exempt income justified the deletion of the disallowance u/s 14A.

In conclusion, both the assessee and revenue appeals were dismissed by the Tribunal, upholding the CIT(A) order for AY 2012-13. The judgment provides a detailed analysis of the disallowances under sections 36(1)(iii) and 14A, emphasizing commercial expediency, fund utilization, and the absence of exempt income as crucial factors in determining the disallowances.