2020 (11) TMI 764 - AT - Income Tax

Disallowance u/s 36(1)(iii) - claim interest expenditure disallowed as investment made in subsidiary companies - sister concerns have invested in capital assets and mutual funds and not utilized the same in commercial activities - HELD THAT - The assessee company is holding substantial shareholding and also considering the set up of the group companies, we can see that Global Holding company controls the whole group concerns which includes assessee company. The assessee company also under control of Global Holding. Assessee companies invest in other group companies in which holding company controls the majors shares as well as controls composition of directors. The companies GIL and CNIL are subsidiary companies, which clearly indicates that the investment made by the assessee company in other sister concerns rather we can say subsidiary companies are meant to be for commercial expediency and commercial necessity. Therefore, in our considered view the investment made by the assessee in these companies are for commercial expediency and we also note that apart from it is holding substantial shares and we also notice that substantial portion of their commercial activities are sourced through the subsidiary companies. These investments made by the assessee will fall within the term business expediency /commercial expediency expressed by the Hon ble Apex Court in its landmark judgement of S. A. Builders 2006 (12) TMI 82 - SUPREME COURT . Therefore, the investment made by the assessee are for its commercial purposes hence the interest expenditure borne by the assessee for the investment made by the assessee on its subsidiary company are allowable expenditure under section 37(1) of the Act. Therefore, we are inclined to allow the grounds raised by the Assessee. Accordingly, grounds raised by the assessee are allowed.

Issues Involved:

1. Disallowance of interest expenditure under Section 36(1)(iii) of the Income Tax Act.
2. Commercial expediency and business rationale of investments in associate companies.
3. Tax effect and maintainability of the revenue's appeal.
4. Procedural compliance regarding the pronouncement of the order beyond 90 days due to COVID-19 lockdown.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenditure under Section 36(1)(iii):

The assessee filed its original and revised returns for AY 2013-14, declaring substantial losses. The case was selected for scrutiny, and the Assessing Officer (AO) disallowed interest expenditure on the grounds that the assessee received exempt income. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition but issued an enhancement notice, observing that the assessee's investments in shares exceeded its interest-free funds. The CIT(A) held that the funds invested in associate companies were not used for business purposes but for making investments in other concerns or mutual funds, thus disallowing the interest expenditure under Section 36(1)(iii).

2. Commercial Expediency and Business Rationale of Investments:

The assessee argued that the investments in Chennai Network Infrastructure Ltd (CNIL) and GTL Infrastructure Ltd (GIL) were made for business purposes, citing commercial expediency. The assessee relied on the Supreme Court's decision in S. A. Builders vs. CIT, which allows interest expenditure if the borrowing satisfies the test of commercial expediency. The assessee demonstrated that the investments were made to boost its own revenues through operational business from these associate companies. The CIT(A) rejected this contention, stating that the funds were used for investments in other concerns and mutual funds, not for business purposes.

3. Tax Effect and Maintainability of Revenue's Appeal:

The revenue's appeal was dismissed as the tax effect of the relief granted by the CIT(A) was below ?50 lakhs, making it non-maintainable as per CBDT Circular No. 17 of 2019. The Departmental Representative (DR) conceded that the appeal fell under the monetary limit prescribed by the CBDT.

4. Procedural Compliance Regarding Pronouncement of Order Beyond 90 Days:

The order was pronounced beyond 90 days from the date of hearing due to the COVID-19 lockdown. The Tribunal relied on the decision in JSW Ltd and the exceptional circumstances caused by the pandemic, which justified the delay. The Tribunal noted that the lockdown period should be excluded when computing the 90-day period for pronouncement of orders, aligning with the guidelines issued by the Hon'ble Supreme Court and Bombay High Court.

Conclusion:

The Tribunal concluded that the investments made by the assessee in its associate companies were for commercial expediency, allowing the interest expenditure under Section 36(1)(iii). The revenue's appeal was dismissed due to the low tax effect, and the procedural compliance regarding the delayed pronouncement was justified given the COVID-19 lockdown. The appeal filed by the assessee was allowed, and the revenue's appeal and cross-objection were dismissed.

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