2018 (5) TMI 1630 - AT - Income Tax

Tax liability of notional interest on interest free loan advanced to subsidiary companies - disallowances of interest paid to group Companies - disallowances of foreign education expenses - Held that - if there are funds available both interest free and over draft and or loan taken, then a presumption would arise that investment would be out of the interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investments - interest free funds available with assessee is ₹ 151 crores whereas the amount identified as interest free advances given by the assessee to sister concern is only ₹ 30.50 crores - Therefore, the disallowance of interest cannot be made on that ground only - thus disallowance of interest u/s 36(1)(iii) is not sustained - Decided in favor of assessee. Expenses incurred in respect of foreign education of the Director - Held that - the main purpose as per the company is that education of director would be useful in expanding the export business of the company in long run - this expenditure is in the nature of training expenditure of the Director herself - thus full tuition fee is allowed - Decided in favor of assessee. Disallowance of interest on term loan and car loan u/s 14A - Held that - interest is related for the purposes of investment in exempt income yielding investment - thus allowed - Decided in favor of assessee.

Summary

Issues Involved:
1. Deletion of notional interest on interest-free loans/advances to subsidiary companies.
2. Restriction of alternative addition of interest paid under section 36(1)(iii).
3. Disallowance of foreign education expenses.
4. Computation of disallowance under section 14A Rule 8D by excluding interest expenses.

Issue-wise Detailed Analysis:

1. Deletion of Notional Interest on Interest-Free Loans/Advances to Subsidiary Companies:
The Revenue challenged the deletion of disallowance of ?3,47,58,711/- on interest-free loans given to subsidiary companies. The Assessing Officer (AO) had added notional interest at 12% on these loans, arguing that the assessee, being a Non-Banking Financial Company (NBFC), should have charged interest. The CIT(A) deleted this addition, stating that the assessee had sufficient own funds (?151 crores) to cover these advances and that the AO cannot impose notional income. The Tribunal upheld the CIT(A)'s decision, referencing the Bombay High Court's ruling in CIT Vs. Reliance Utilities, which supports the presumption that interest-free funds are used for interest-free advances if sufficient interest-free funds are available.

2. Restriction of Alternative Addition of Interest Paid under Section 36(1)(iii):
The AO alternatively disallowed ?99,44,878/- under section 36(1)(iii) if the notional interest addition was deleted. The CIT(A) restricted this disallowance to ?14,76,678/-, which was the interest paid to group companies. The Tribunal agreed with the CIT(A), noting that the assessee had sufficient interest-free funds to cover the advances, thus no disallowance under section 36(1)(iii) was warranted. Consequently, the Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal on this ground.

3. Disallowance of Foreign Education Expenses:
The AO disallowed ?42,89,759/- claimed as staff education expenses for a director's MBA program, arguing it was personal and not substantiated with bills. The CIT(A) allowed ?35,57,582/- of this amount, recognizing the business relevance of the director's education. The Tribunal upheld the CIT(A)'s decision, noting the director's active role in the company and the business relevance of her MBA. However, the Tribunal agreed with the CIT(A) in disallowing certain personal expenses (such as travel and living expenses) and upheld the partial disallowance.

4. Computation of Disallowance under Section 14A Rule 8D by Excluding Interest Expenses:
The AO made an additional disallowance under section 14A, applying Rule 8D, which the CIT(A) reduced by excluding interest on term loans and vehicle loans (?50,60,179/-). The Tribunal upheld the CIT(A)'s decision, referencing a similar ruling in the assessee's case for the assessment year 2008-09, where such interest was excluded from the disallowance computation under Rule 8D(ii).

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, upholding the CIT(A)'s decisions on all relevant issues. The order was pronounced in the open court on 21st May 2018.