2010 (6) TMI 75 - HC - Income Tax

Interest on interest free loan deletion of addition made account of interest on interest free loan computation of deduction u/ 80M - deduction u/s 80M should be computed without apportioning any part of interest payment to the earning of the dividend Held that - deduction available to an assessee under Section 36(1)(iii) of the Income Tax Act, 1961 in respect of the interest component on capital borrowed is to be determined in consonance with the judgment rendered by the Apex Court in S.A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals) and another 2008 -TMI - 3364 - SUPREME COURT so as to determine the commercial expediency of the assessee, in extending interest free loan - for the sake of consistency, set aside the order of the Tribunal on the first question of law - The CIT(A) had inferred that there could hardly be any expenditure incurred for collecting dividend income received from the UTI and for the remaining dividend income of Rs. 8,00,000/- or so the expenses could not be as high as estimated by the Assessing Officer. The aforesaid findings of the CIT(A) have been duly affirmed by the Tribunal upholding the disallowance of Rs. 1,00,000/- sustained by the CIT(A) for allowing relief under Section 80M. - second question deserves to be answered against the revenue and in favour of the assessee

Issues Involved:
1. Deletion of addition made on account of interest on interest-free loans advanced by the assessee-company to its sister concern.
2. Computation of deduction under Section 80M without apportioning any part of interest payment to the earning of the dividend.

Detailed Analysis:

Issue 1: Deletion of Addition on Account of Interest on Interest-Free Loans
The revenue appealed against the deletion of an addition of Rs. 1,52,95,000/- made by the Assessing Officer (AO) on account of interest on interest-free loans advanced by the assessee to its sister concern, M/s Swaraj Mazda Ltd. The AO had made this addition on the grounds that the assessee had advanced interest-free loans to its sister concern, which should have attracted interest income.

The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, noting that there was no change in the facts of the case compared to previous years (1991-92, 1992-93, and 1993-94). The CIT(A) found that the assessee had sufficient surplus funds that were non-interest bearing, and there was no direct nexus between the borrowed funds and the interest-free loans given to the sister concern. This view was upheld by the Income Tax Appellate Tribunal (ITAT), which relied on its previous orders for the assessment years 1991-92 and 1992-93, where it was established that the assessee had sufficient interest-free advances to cover the loans given to the sister concern.

The High Court noted that the same issue had been remitted back to the Tribunal for fresh decision in accordance with the Supreme Court's judgment in S.A. Builders Ltd. v. Commissioner of Income-Tax (Appeals), [2007] 288 ITR 1, which emphasized determining the commercial expediency of the assessee in extending interest-free loans. Consequently, the High Court set aside the Tribunal's order on this issue and remanded the matter back to the Tribunal for re-adjudication.

Issue 2: Computation of Deduction under Section 80M
The second issue pertained to the computation of deduction under Section 80M of the Income-tax Act, 1961. The AO had reduced expenses of Rs. 1,66,76,739/- (comprising interest on investments and administrative expenses) from the gross dividend income to compute the deduction under Section 80M. The CIT(A), however, held that the assessee had sufficient surplus funds that were non-interest bearing and found no nexus between any borrowing of funds and the investment in the units. Therefore, the CIT(A) directed the AO to recompute the deduction under Section 80M without apportioning any part of the interest payment to the earning of the dividends, although the estimation of management expenses of Rs. 1,00,000/- was upheld.

The ITAT upheld the CIT(A)'s decision, following the principle of consistency from its earlier orders for the assessment years 1992-93 and 1993-94, where similar findings were made. The Tribunal noted that the majority of the dividend income was received from UTI, for which hardly any expenditure would have been incurred, and the remaining dividend income did not justify the high expenses estimated by the AO.

The High Court observed that the revenue had accepted the Tribunal's order for the earlier years and had not preferred any appeal. Following the principle of consistency as laid down in various Supreme Court judgments, the High Court answered the second question against the revenue and in favor of the assessee.

Conclusion:
The appeal was disposed of with the first issue being remanded back to the Tribunal for fresh adjudication in light of the Supreme Court's judgment in S.A. Builders Ltd., and the second issue being decided in favor of the assessee based on the principle of consistency.

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