2023 (10) TMI 1060 - AT - Income Tax

Interest disallowance u/s 36(1)(iii) - assessee advanced interest free funds to its group concerns - interest on borrowed capital proportional to amount advanced to sister concerns - HELD THAT - As interest-free funds available with the assessee in the shape of share capital and reserves surplus far exceeds the short term loans and advances adduced by the assessee. The assessee uses mixed funds. In such a case, a presumption would arise in assessee s favor that the advances were made out of interest-free funds available with the assessee and the onus would be on Ld. AO to justify the impugned disallowance. We find that no such exercise has been carried out by Ld. AO and therefore, it was to be presumed that funds were advances first out of interest free funds available with the assessee. The cited case law of CIT Vs. Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT duly supports this view. Another finding rendered by Ld. CIT(A) is that the funds were advanced out of commercial expediency. The said finding remains uncontroverted before us. Also in the case of S.A. Builders Ltd. 2006 (12) TMI 82 - SUPREME COURT held that once nexus was established between the expenditure and the purpose of the business, which need not necessarily be the business of the assessee itself, revenue could not disallow the claim assuming what was reasonable. Therefore, on the facts and circumstances, we concur with the adjudication of Ld. CIT(A) and dismiss the ground raised by the revenue, in both the years. Disallowance u/s 37(1) - sponsorship expenses - HELD THAT - We find that the assessee has paid sponsorship fees in terms of an agreement to carry out business promotional activities. As per the terms of the agreement, Sri Balaji Charitable and Educational Trust was to carry out various sponsorship activities in assessee s name as sponsor against yearly payment of Rs. 2.50 Crores. The payment is backed by the agreement and invoices and the revenue has no material to doubt the same. The assessee has also furnished the details of actual expenditure incurred on business promotion activities. In such a case, it was not open for Ld. AO to question the commercial wisdom of the assessee as to how the business was to be promoted. Assessee s logo has been used on stationary items and other record books which would be used by large number of students and enhance the image of the assessee in the minds of the parents of the students. Similarly, there is no basis to arrive at a conclusion that 50% of other expenditure was to be considered as an expenditure qualifying the test laid down u/s 37(1). There is no material whatsoever to reach such a conclusion. The case law of Hon ble High Court of Madras in the case of MRF Ltd. 2021 (4) TMI 501 - MADRAS HIGH COURT duly supports our view as held that it was not for Ld. AO to decide what would be good for the assessee in promoting its business and therefore, decision cannot be arrived at by the Assessing Officer based on his own personal perceptions and it should be left to the decision of the assessee, who is the best person, who knows that what would be best for his business activity. Therefore, concurring with the adjudication of Ld. CIT(A) in the impugned order, we dismiss the corresponding grounds in both the years. Decided in favour of assessee.

Summary

Issues Involved:
1. Interest disallowance under Section 36(1)(iii).
2. Disallowance of business expenses under Section 37(1).

Summary:

Interest Disallowance u/s 36(1)(iii):

The revenue challenged the deletion of the addition of Rs. 2,04,45,076/- made towards disallowance of interest on borrowed capital proportional to the amount advanced to sister concerns. The Assessing Officer (AO) observed that the assessee advanced interest-free funds to its group concerns while having significant borrowings and related interest expenditure. The AO computed a proportionate disallowance of Rs. 204.45 Lacs. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this disallowance, relying on judicial precedents including the Supreme Court's decision in S.A. Builders Ltd. and CIT Vs. Reliance Industries Ltd. The Tribunal upheld the CIT(A)'s decision, noting that the assessee's interest-free funds exceeded the advances made, thus presuming the advances were out of interest-free funds. The Tribunal found no exercise by the AO to justify the disallowance, and concurred with the CIT(A) that the funds were advanced out of commercial expediency.

Disallowance u/s 37(1):

The revenue contested the deletion of Rs. 1,79,93,880/- towards disallowance of sponsorship expenses. The AO disallowed the expenses, arguing they were not incurred wholly and exclusively for the assessee's business. The assessee claimed these expenses were for promoting its brand through a college, supported by a sponsorship agreement and invoices. The AO allowed only 50% of certain expenses and disallowed the rest, questioning the commercial purpose. The CIT(A) accepted the assessee's submissions, noting the promotional activities were in line with the business objectives and the expenses were incurred as per the agreement. The Tribunal upheld the CIT(A)'s decision, emphasizing that it was not the AO's role to question the commercial wisdom of the assessee. The Tribunal found no basis for the AO's partial disallowance and concurred with the CIT(A) that the expenses were for business promotion, supported by the case law of MRF Ltd.

Conclusion:

Both appeals by the revenue were dismissed.

Order pronounced on 20th October, 2023.