2021 (9) TMI 882 - AT - Income Tax

Revision u/s 263 - disallowance of the assessee s claim for deduction of interest expenditure u/s 36(1)(iii) - HELD THAT - Assessee had sufficient owned funds to source the interest-free advance that was given to its subsidiary company is not in dispute. The controversy involved in the present appeal hinges around the aspect, that as per the department if an assessee had borrowed certain funds on which liability to pay interest is being incurred; and on the other hand had advanced certain amounts to its sister concern or other third parties without charging any interest and without any business purpose, then, the proportionate interest correlating to the amount so advanced without charging any interest was liable to be disallowed u/s 36(1)(iii) of the Act. We are of a strong conviction that the aforesaid view taken by the lower authorities is absolutely misconceived and in fact misplaced. In our considered view, if there be interest-free funds available with an assessee which are sufficient to meet its interest free investments; and at the same time the assessee had raised interest bearing loans, then, the presumption would be that the investments in question were made by the assessee from the interest-free funds so available with it. Our aforesaid view is fortified by the judgment of CIT vs. Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT as observed that in case if the assessee had advanced interest-free amounts out of its mixed funds i.e interest free and interest bearing funds lying in common pool, then, the presumption would be that the amount so advanced was from the interest-free funds available with the assessee company. We are unable to persuade ourselves to subscribe to the view taken by the lower authorities who had disallowed the assessee s claim for deduction of the interest expenditure under Section 36(1)(iii) of the Act, for the reason, that as the assessee was in receipt of interest bearing funds, therefore, it was to be presumed that the interest-free funds given by it to its subsidiary company, viz. SRPL were out of such interest bearing funds. We, thus, not finding favor with the view taken by the lower authorities set-aside the order passed by the CIT(A), to the extent he had upheld the disallowance of the assessee s claim for deduction of interest expenditure u/s 36(1)(iii) of the Act. - Decided in favour of assessee.

Issues Involved:
1. Disallowance of notional interest under section 36(1)(iii) of the Income Tax Act, 1961.
2. Commercial expediency for giving interest-free advance.
3. Levying of interest under sections 234B and 234C of the Act.
4. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Detailed Analysis:

1. Disallowance of Notional Interest under Section 36(1)(iii):
The assessee challenged the disallowance of notional interest of ?78,84,000/- on the grounds that interest-bearing funds were advanced to its subsidiary without charging any interest. The assessee argued that it had sufficient own funds to cover the interest-free advance of ?6.57 crores given to its subsidiary, Sicom Realty Pvt. Ltd. (SRPL). The tribunal referred to the judgment of the Hon’ble High Court of Bombay in CIT Vs. Reliance Utilities and Powers Ltd. (2009) 313 ITR 340 (Bom), which established that if interest-free funds are available and sufficient to meet the interest-free investments, it should be presumed that the investments were made from such interest-free funds. The tribunal found that the assessee had sufficient own funds and thus set aside the disallowance made by the lower authorities.

2. Commercial Expediency for Giving Interest-Free Advance:
The assessee contended that the interest-free advance was given to its subsidiary for commercial expediency, which is a valid business purpose under the law. The tribunal acknowledged that the assessee is engaged in the business of project financing, and the advances were given wholly and exclusively for business purposes. Thus, the tribunal accepted the assessee's argument that the commercial expediency justified the interest-free advance.

3. Levying of Interest under Sections 234B and 234C:
The assessee also contested the levying of interest under sections 234B and 234C of the Act. However, the tribunal's detailed analysis primarily focused on the disallowance of interest expenditure under section 36(1)(iii) and did not provide an in-depth discussion on this issue. The outcome of this contention was not explicitly detailed in the provided judgment summary.

4. Initiation of Penalty Proceedings under Section 271(1)(c):
The assessee challenged the initiation of penalty proceedings under section 271(1)(c) of the Act. The tribunal's judgment primarily addressed the disallowance of interest expenditure and did not elaborate on the penalty proceedings. The resolution of this issue was not explicitly detailed in the provided judgment summary.

Conclusion:
The tribunal allowed the appeal filed by the assessee, setting aside the order of the CIT(A) to the extent it upheld the disallowance of the interest expenditure of ?78,84,000/- under section 36(1)(iii) of the Act. The judgment emphasized the principle that if an assessee has sufficient interest-free funds, it should be presumed that the interest-free investments were made from such funds. The tribunal's decision was pronounced in the open court on 27.08.2021.

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