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2019 (1) TMI 992 - AT - Income TaxAddition u/s 36(1)(iii) - disallowance of interest expenditure - assessee company has used the borrowed funds for non-business purposes - Held that - It is not in dispute that the investments in mutual funds had not started till the time, the assessee started earning operating income from transmission of electricity. Not in dispute that the borrowed funds were entirely used by the assessee for investment in fixed assets for the purposes of business. In dispute that the assessee had adequate interest free funds of its own for making investments in mutual funds. Not in dispute that there were contractual restrictions imposed on assessee in respect of utilization of borrowed funds; and also, the assessee was liable for payment of substantial amounts of liquidation damages/pre-payment charges in case the assessee made pre-payment of loan repayments. Thus, it is also not in dispute that due to contractual restrictions and liquidation damages/pre-payment charges, as aforesaid; it was neither prudent for the assessee to divert any part of borrowed funds for non-business purposes; nor was it prudent to make pre-payment of loan repayments even if the assessee had its own interest free funds. In these specific and peculiar facts and circumstances, there is no case for any disallowance of interest u/s 36(1)(iii) of I.T. Act. Disallowance of interest U/s 36(1)(iii) on merits. Accordingly, both the appeals filed by the Revenue are dismissed.
Issues Involved:
1. Deletion of addition under Section 36(1)(iii) of the Income Tax Act, 1961, on account of disallowance of interest expenditure for Assessment Years 2007-08 and 2010-11. 2. Reopening of assessment proceedings under Section 148 read with Section 147 of the Income Tax Act, 1961, for Assessment Year 2007-08. Issue-wise Detailed Analysis: 1. Deletion of Addition under Section 36(1)(iii) of the Income Tax Act, 1961: - Grounds of Appeal by Revenue: - The CIT(A) erred in deleting the addition of ?6,45,21,521/- and ?15,41,80,533/- for A.Y. 2007-08 and A.Y. 2010-11, respectively, on account of disallowance of interest expenditure, by not appreciating that the assessee company used borrowed funds for non-business purposes. - The AO had provided detailed reasons for disallowances in the assessment order. - Assessee's Contentions: - The borrowed funds were utilized exclusively for business purposes. - The assessee had sufficient funds of its own to make investments in mutual funds. - The loan agreements with Asian Development Bank, International Financial Corporation, and State Bank of India had restrictions on the use of borrowed funds and imposed penalties for prepayment. - CIT(A)'s Findings: - The CIT(A) deleted the disallowance of interest expenditure by holding that the assessee used the borrowed funds for business purposes and had sufficient interest-free funds for investments. - The CIT(A) relied on various judicial precedents, including the case of Reliance Utility & Power Ltd., which established that if there are sufficient interest-free funds, the presumption is that investments are made from those funds. - ITAT's Decision: - The ITAT upheld the CIT(A)'s order, noting that the facts were not in dispute, including the use of borrowed funds for business purposes and the adequacy of interest-free funds for investments. - The ITAT also noted the contractual restrictions and penalties associated with the loans, making it imprudent for the assessee to divert borrowed funds for non-business purposes. - The ITAT dismissed the Revenue's appeals for both A.Y. 2007-08 and A.Y. 2010-11. 2. Reopening of Assessment Proceedings under Section 148 read with Section 147 of the Income Tax Act, 1961: - Grounds of Cross Objection by Assessee: - The CIT(A) erred in upholding the reopening of assessment proceedings under Section 148 read with Section 147, without appreciating that there was no fresh and tangible material and the reopening was based on a mere change of opinion. - CIT(A)'s Findings: - The CIT(A) upheld the reopening of assessment, stating that there were sufficient reasons for the AO to believe that income had escaped assessment. - The CIT(A) cited various judicial precedents, including the case of Raymond Woollen Mills Ltd. and Assistant Commissioner of Income Tax vs. Rajesh Jhaveri Stock Brokers (P) Ltd., which held that the AO must have "reason to believe" that income had escaped assessment, and the formation of belief is within the realm of subjective satisfaction. - ITAT's Decision: - The ITAT noted that since the deletion of disallowance under Section 36(1)(iii) was upheld, the cross-objection regarding the reopening of assessment became infructuous and academic in nature. - The ITAT declined to adjudicate on the cross-objection, making it partly allowed for statistical purposes. Conclusion: - The ITAT dismissed the Revenue's appeals for A.Y. 2007-08 and A.Y. 2010-11, upholding the CIT(A)'s deletion of disallowance of interest expenditure under Section 36(1)(iii). - The ITAT partly allowed the assessee's cross-objection for A.Y. 2007-08 for statistical purposes, without adjudicating on the merits of the reopening of assessment proceedings.
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