2021 (9) TMI 282 - AT - Income Tax

Interest disallowance u/s 36(1)(iii) - nexus between the borrowed funds and advances granted by the assessee - proof of commercial expediency - advances were made at lower rate of interest and in the absence of any commercial / business expediency, the interest disallowance as made by Ld.AO - assessee submitted that there was sufficient interest free own funds with the assessee and the advances were out of commercial expediency - CIT - A deleted the addition - HELD THAT - As could be seen that there was commercial expediency for the assessee to grant the loan to M/s RHSL since the success of RHSL would impact the business interest as well as profitability of the group as a whole. The main objective was not to earn the interest but to further the business interest of the group as a whole. Hence, no infirmity could be found in the conclusion of Ld. CIT(A) that the funds were advanced out of commercial expediency / business exigencies. The case law of CIT V/s United Breweries 1972 (1) TMI 6 - MYSORE HIGH COURT as referred to by Ld. CIT(A), duly support the said proposition. The same is also supported by case of S.A. Builders V/s CIT 2006 (12) TMI 82 - SUPREME COURT wherein it was held that it was enough to show that the money was expanded not out of necessity and with a view to direct and immediate benefit but voluntarily and on grounds of commercial expediency and in order to indirectly facilitate the carrying on the business. The expression commercial expediency was of wide import and would include such expenditure as a prudent businessman would incur for the purpose of business. The expenditure may not have been incurred under any legal obligation but yet is allowable as business expenditure if it was incurred on grounds of commercial expediency. Therefore, we concur with the conclusions drawn by Ld. CIT(A), in this regard. Only requirement to claim interest expenditure u/s 36(1)(iii) is that the borrowed funds should have been expanded wholly and exclusively for business purposes - As undisputed fact that there is one-to-one correlation between the borrowed funds and the advances granted by the assessee. The funds have been lent for business purposes since the main objective was to develop the SEZ. Therefore, in our considered opinion, the primary requirement to claim deduction u/s 36(1)(iii) was duly fulfilled by the assessee. CIT(A) has computed average borrowing rate @2.99% which would further support the case of the assessee only. - Decided against revenue. Disallowance u/s 14A - suo-moto disallowance made by assessee - CIT-A deleted the addition - HELD THAT - It is undisputed fact that the assessee has claimed expenditure of ₹ 11 Lacs only out of which it has already offered suo-moto disallowance of ₹ 2.13 Lacs u/s 14A and another disallowance of ₹ 5.77 Lacs as Balances written off . It could be seen that the assessee is a corporate entity and it would necessarily be required to incur routine expenditure to maintain its corporate personality. Therefore, no further disallowance would be warranted on the given facts. By confirming the stand of Ld. CIT(A) on this issue, Dismiss ground of Reveue.

Summary

Issues Involved:
1. Justification for interest disallowance under Section 36(1)(iii).
2. Validity of disallowance under Section 14A.

Detailed Analysis:

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

The primary issue was whether the interest disallowance made by the Assessing Officer (AO) under Section 36(1)(iii) was justified. The AO disallowed interest expenses on the grounds that the assessee charged a lower interest rate on loans advanced to certain entities compared to the interest rate it paid on borrowed funds from its parent company, Reliance Industries Ltd. (RIL). The AO argued that there was a one-to-one nexus between the borrowed funds and the advances granted by the assessee, and the lower interest rates charged indicated a lack of commercial expediency.

The assessee contended that the loans were given for business purposes and commercial expediency, particularly to develop a Special Economic Zone (SEZ) through its subsidiary, Reliance Haryana SEZ Ltd. (RHSL). The assessee argued that the funds were used for business purposes, fulfilling the conditions under Section 36(1)(iii). The CIT(A) concurred with the assessee, citing the decision of the Supreme Court in S.A. Builders V/s CIT, which held that loans advanced to a sister concern for commercial expediency are allowable as business expenditure.

The Tribunal upheld the CIT(A)'s decision, noting that the loans were granted out of commercial expediency to further the business interests of the group. The Tribunal also observed that the average borrowing rate of 2.99% was much lower than the interest charged from RHSL, supporting the assessee's case. Consequently, the Tribunal found no infirmity in the CIT(A)'s conclusion that the funds were advanced out of commercial expediency and dismissed the revenue's grounds on this issue.

2. Disallowance under Section 14A:

The second issue was the disallowance under Section 14A related to the assessee's exempt dividend income. The AO invoked Rule 8D to compute an indirect expense disallowance, restricting it to the total expenditure claimed by the assessee. The assessee had already made a suo-moto disallowance of ?2.13 Lacs under Section 14A.

The CIT(A) found that the assessee had claimed total expenses of ?14.34 Lacs, out of which ?2.13 Lacs were disallowed suo-moto under Section 14A, and another ?5.77 Lacs were disallowed as 'Balances written off.' The CIT(A) held that the disallowance made by the AO was not justified, as the assessee's suo-moto disallowance was reasonable and fair.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee, being a corporate entity, would necessarily incur routine expenditure to maintain its corporate personality. Therefore, no further disallowance was warranted. The Tribunal dismissed the revenue's ground on this issue as well.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on both issues of interest disallowance under Section 36(1)(iii) and disallowance under Section 14A. The Tribunal found that the loans were advanced out of commercial expediency and that the assessee's suo-moto disallowance under Section 14A was reasonable.