2015 (6) TMI 797 - AT - Income Tax

Disallowance of interest under section 36(1)(iii) - CIT(A) deleted the addition - Held that - Where the assessee had established availability of funds of its own and also where the investment was made in 100% subsidiary of the assessee, which in turn was engaged in the same line of business and had utilised the funds for its business, the existence of commercial expediency stands proved. In case the connection between the lender and the borrower is of commercial expediency, then in view of the ratio laid down by the Hon ble Supreme Court in SA Builders Ltd. (2006 (12) TMI 82 - SUPREME COURT), no disallowance is warranted under section 36(1)(iii) of the Act. In view thereof we hold that there is no justification for disallowing interest under section 36(1)(iii) of the Act and uphold the order of the CIT(A) - Decided in favour of assessee. Disallowance of remuneration paid to the Directors - CIT(A) allowed claim - Held that - A.O. has disallowed the remuneration on the ground that much less remuneration was paid in the case of sister concern. Although, this could be a starting point to suspect that excessive remuneration was paid but for effecting an addition the suspicion has to be grounded on fair market value of services rendered. The A.O. however, did not carry out such exercise. On the other hand the appellant has explained that the appellant is a 35 year old company whereas the subsidiary is only in business for last 4 years. It has also been mentioned that the subsidiary is export oriented unit which is mainly automated and located in single building with less overheads. The A.O. has not indicated as to how the turnover could be a sound basis for comparison of remuneration. Even if it is so, there could be a case for examining the lesser remuneration paid in the case of subsidiary company. The remuneration of around ₹ 25 lakhs paid to three directors who were promoters of the company in 35 year old company does not seem to be excessive and thus the disallowance of ₹ 22,80,000/- is directed to deleted. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of interest under section 36(1)(iii) of the Income Tax Act.
2. Excessive remuneration paid to directors compared to sister company.

Issue 1: Disallowance of Interest:
The Revenue appealed against the deletion of addition of interest disallowed under section 36(1)(iii) of the Act. The Assessing Officer (AO) noted interest-free advances made by the assessee to its subsidiary company and questioned the purpose of these advances. The AO disallowed Rs. 18,50,000 as interest under section 36(1)(iii). The CIT(A) found that the advances were made to a 100% subsidiary engaged in the same business as the assessee, utilizing the funds for business purposes. The CIT(A) held that no disallowance was warranted under section 36(1)(iii). The Revenue argued lack of commercial expediency in the plea of the assessee. However, the tribunal upheld the CIT(A)'s decision, noting the business relationship between the lender and borrower, following the Supreme Court's decision in S.A. Builders Ltd. case.

Issue 2: Excessive Remuneration to Directors:
The Revenue challenged the deletion of addition of Rs. 13,90,000 as interest expenditure and the allowance of excess remuneration of Rs. 22,80,000 paid to directors compared to the sister company. The CIT(A) upheld the deletion of disallowance under section 36(1)(iii) and allowed the excess remuneration paid to directors. The AO had disallowed the remuneration due to apparent excessive payment compared to the sister concern. The CIT(A, however, found no justification for disallowance, considering the services rendered and the nature of business. The tribunal concurred with the CIT(A)'s findings, noting the lack of grounds for suspicion on fair market value of services rendered, and upheld the decision to allow the remuneration. Consequently, all appeals filed by the Revenue were dismissed.

This judgment addresses the disallowance of interest under section 36(1)(iii) of the Act and the excessive remuneration paid to directors. The tribunal upheld the CIT(A)'s decision in both instances, emphasizing the business relationship between the parties and the justification for the payments made.