2013 (7) TMI 444 - AT - Income Tax

Interest on interest free loans / advances given to subsidiaries and associate concerns - CIT(A) deleted addition - Held that - It is an undisputed fact that the assessee had granted loans and advances to its associates and the loans and advances outstanding as on 31.03.2001 to its subsidiaries and its associates was same as that on 31.03.2000 except for an increase of ₹ 0.03 lacs, which supports the contentions of the assessee that no new loans and advances have been granted to the aforesaid concern during the year. Further, from the balance sheet as on 31.03.2001, the assessee has demonstrated that it was having sufficient interest free funds at its disposal. Further, the A.O. has not brought out any tangible evidence to support his contention that interest bearing loans taken by the assessee for the purpose of its own business have been used for non business purpose and the nexus between interest bearing loans and interest free advances has not been proved by the A.O. As decided in assessee s own case 2013 (5) TMI 760 - GUJARAT HIGH COURT there is no diversion of interest bearing funds to interest free advances - disallowance made under section 36(1)(iii) deleted - In favour of assessee. Disallowance u/s.14A - Held that - It is an undisputed fact that no fresh investments have been made by the assessee during the year. It is also a fact that as per the balance sheet of the assessee, the interest free funds in form of capital, reserves and surplus are to the extent of ₹ 84,45,567/- lacs whereas the investments are to the extent of ₹ 22.707/- lacs. Thus, the share holder funds are far in excess of the investments. See CIT vs. Reliance Utilities & Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY & CIT vs. Hero Cycles Ltd. (2009 (11) TMI 33 - PUNJAB AND HARYANA HIGH COURT). In the present case, the A.O. has not given a specific finding with respect to the expenditure incurred by assessee for earning tax free income. Further, the interest free funds available with the assessee are far in excess of investments. Thus no addition u/s. 14A can be made. In favour of assessee.

Summary

Issues Involved:
1. Deletion of addition on account of disallowance of interest on interest-free loans/advances given by the assessee to its subsidiaries and associate concerns.
2. Deletion of disallowance of interest expenses under section 14A of the Income Tax Act in respect of dividend income which is exempt from tax.

Issue-wise Detailed Analysis:

1. Disallowance of Interest on Interest-Free Loans/Advances:

The first issue pertains to the addition of Rs. 7,97,82,157/- on account of interest-free loans given by the assessee. The Assessing Officer (A.O.) observed that the assessee company had advanced various interest-free advances to subsidiaries and associate concerns while paying heavy interest on secured and unsecured loans. The A.O. concluded that borrowed funds were utilized for making these interest-free advances, leading to the disallowance of Rs. 7,97,82,157/-. The ITAT had previously set aside the issue to the A.O. for reconsideration from the angle of business expediency. Upon reassessment, the A.O. maintained the disallowance, citing the lack of proof of commercial expediency by the assessee.

The CIT(A) allowed the assessee's appeal, noting that similar issues had been resolved in favor of the assessee in earlier years, and the assessee had sufficient interest-free funds at its disposal. The CIT(A) also referenced the decision of the Hon'ble Gujarat High Court, which had dismissed the Revenue's appeal on similar grounds in earlier years. The Tribunal upheld the CIT(A)'s order, emphasizing that the assessee had sufficient interest-free funds and that the A.O. failed to establish a direct nexus between the interest-bearing loans and the interest-free advances.

2. Disallowance of Interest Expenses under Section 14A:

The second issue involves the disallowance of interest expenses under section 14A of the Income Tax Act. The A.O. noticed that the assessee had received substantial dividend income, which is exempt from tax, and had raised funds utilized for investment in UTI and domestic companies. The A.O. made an addition of Rs. 64 lacs under section 14A, assuming that a portion of the borrowed funds was used for earning tax-free income.

The CIT(A) deleted the addition, noting that the investments were made in earlier years and no fresh investments were made during the assessment years in question. The CIT(A) also observed that the assessee had significant interest-free funds, which were far in excess of the investments. The Tribunal upheld the CIT(A)'s decision, referencing the principles laid down by the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd., which established that if interest-free funds are sufficient to cover the investments, a presumption arises that investments are made out of interest-free funds. The Tribunal also cited the Hon'ble Punjab & Haryana High Court's decision in Hero Cycles Ltd., which held that disallowance under section 14A requires a finding of actual expenditure incurred for earning exempt income.

Conclusion:

The Tribunal dismissed the Revenue's appeals, affirming the CIT(A)'s decisions to delete the additions on account of disallowance of interest on interest-free loans/advances and disallowance of interest expenses under section 14A. The Tribunal's decision was based on the facts that the assessee had sufficient interest-free funds and that the A.O. failed to establish a direct nexus between the interest-bearing loans and the interest-free advances or investments.