2020 (9) TMI 231 - AT - Income Tax

Disallowance of interest expenditure - Difference of unsecured loan on which interest is paid is not commensurate in with interest received on loans and advances - advances given to the sister concern or associated concerns at interest are sourced from interest-bearing loans obtained - assessee has incurred interest cost of ₹ 376,982,874/ on unsecured loans amounting to ₹ 512 crores and assessee has earned interest of ₹ 376,951,117/ on loans and advances of ₹ 344 crores - HELD THAT - Assessee has submitted a chart of interest charged which also supports the view that advances given to the sister concern or associated concerns at interest are sourced from interest-bearing loans obtained by the assessee. It is also undisputed fact that the total interest received by the assessee of ₹ 376,982,874/ is taxed under the head income from other sources by revenue. As assessee has utilised interest-bearing funds for the purpose of making investment/giving advances to the sister concern on interest, which is charged to taxed Under the head income from other sources, assessee is entitled to deduction u/s 57 (iii) of the act of any expenditure which is not in the nature of capital expenditure, if it is laid out and expended wholly and exclusively for the purpose of making or earning such income. Undisputedly there is no claim by the revenue that above expenditure is in the nature of capital expenditure. The interest income earned by the assessee is from loans and advances given to sister concern which is shown by the assessee to have been financed by obtaining loan on interest from other parties. Therefore, such interest paid on unsecured loan is laid out and expended wholly and exclusively for the purpose of making an earning such interest income. Relevant judicial pronouncements placed before us by both the parties also canvass a view that any expenditure incurred by the assessee which is not in the nature of capital expenditure, if laid out and expended wholly and exclusively for the purpose of making or earning any income which is chargeable to tax under head income from other sources is allowable as deduction to the assessee u/s 57 (iii) of the act. Allow appeal of the assessee and direct the lower authorities to delete the disallowance of interest expenditure .

Issues Involved:
1. Disallowance of interest expenses under Section 36(1)(iii) of ?257,270,727.
2. Nexus between interest cost and interest income.
3. Terms of amalgamation and their impact on interest expenses.
4. Adequate opportunity to establish the linkage of borrowing cost to interest income.

Detailed Analysis:

1. Disallowance of Interest Expenses under Section 36(1)(iii) of ?257,270,727:
The primary issue revolves around the disallowance of ?257,270,727 out of the total finance cost of ?376,982,874 incurred by the assessee. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that the interest expenses claimed under Section 36(1)(iii) were not entirely for business purposes. The AO noted that the assessee had long-term borrowings of ?512 crores but only ?344 crores were used for loans and advances to sister concerns. The AO thus disallowed the proportionate interest expenditure, asserting that the borrowed funds were not fully utilized for business purposes.

2. Nexus Between Interest Cost and Interest Income:
The assessee argued that the entire interest expenditure was incurred to earn interest income, and thus should be allowable under Section 57(iii) of the Income Tax Act. The AO and CIT(A) rejected this claim, stating that the borrowed funds of ?512 crores could not be fully attributed to the loans and advances of ?344 crores. However, it was established that ?147.37 crores of the borrowings were interest-free loans from directors and shareholders, reducing the interest-bearing borrowings to ?364 crores, which closely matched the loans and advances of ?344 crores. The Tribunal accepted this argument, noting that the assessee had sufficiently demonstrated the utilization of borrowed funds for earning interest income.

3. Terms of Amalgamation and Their Impact on Interest Expenses:
The assessee contended that the terms of amalgamation should be considered while determining the disallowance of interest expenses. The CIT(A) had previously deleted disallowances related to shares acquired through amalgamation, recognizing that no direct expenses were incurred for earning dividend income from those shares. The Tribunal found that the CIT(A)'s earlier decision supported the assessee's claim that the interest expenses were legitimate and should be allowed.

4. Adequate Opportunity to Establish the Linkage of Borrowing Cost to Interest Income:
The assessee argued that they were not given sufficient opportunity to establish the linkage between the borrowing cost and the interest income. The Tribunal reviewed the submissions and evidence provided by the assessee, including balance sheets and detailed explanations of fund utilization. The Tribunal concluded that the assessee had adequately demonstrated the nexus between the borrowed funds and the interest income, and thus, the disallowance was not justified.

Tribunal's Conclusion:
The Tribunal allowed the appeal, directing the lower authorities to delete the disallowance of ?257,270,727 made by the AO and confirmed by the CIT(A). The Tribunal found that the assessee had successfully established the nexus between the borrowed funds and the interest income, and the interest expenses were wholly and exclusively incurred for earning such income. The Tribunal also dismissed the fourth ground of appeal as infructuous in light of its decision on the first three grounds.

Order Pronouncement:
The appeal of the assessee was partly allowed, with the Tribunal ordering the deletion of the disallowance of interest expenditure. The order was pronounced in the open court on 03/09/2020.

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