2017 (3) TMI 1254 - HC - Income Tax

Disallowance of interest expenditure under section 36(1)(iii) - Held that - Admittedly, the assessee company had given interest free loans and advances amounting to ₹ 2297.83 lacs upto the end of the relevant year including ₹ 704 lacs during the relevant year to its three subsidiary companies. The Assessing officer did not make any disallowance in respect of expenditure incurred on borrowed funds under section 36(1)(iii) of the Act in relation to interest free loans and advances given to the said three subsidiary companies in the earlier years. After perusing the cash flow statement of the assessee company for the assessment year in question, the Tribunal observed that the assessee company had received substantial proceeds from preferential issue of shares capital amounting to ₹ 99999.98 lacs. It had also received dividend income of ₹ 166.13 crores from various investments. After giving interest free loans of ₹ 7.04 crores to its subsidiary companies, the assessee was left with surplus interest free funds of ₹ 53.86 crores which were utilized for giving interest free advances. Thus, there was no nexus of interest expenditure incurred during the year with the aforesaid loans/advances given to the subsidiary companies, warranting disallowance under section 36(1)(iii) of the Act. After considering the relevant provisions and the case law on the point, the Tribunal correctly deleted the disallowance of interest expenditure made under section 36(1)(iii) of the Act. - Decided in favour of assessee Addition u/s 14A - Expenditure related to exempt income - Held that - The issue is covered by the decision in the case of the assessee in Commissioner of Income Tax, Jalandhar I, Jalandhar vs. M/s Max India Limited 2016 (11) TMI 1012 - PUNJAB AND HARYANA HIGH COURT as held Merely because the interest free funds with the assessee have decreased during any period, it does not follow that the funds borrowed on interest were utilized for the purpose of investing in assets yielding exempt income. If even after the decrease the assessee has interest free funds sufficient to make the investment in assets yielding the exempt income, the presumption that it was such funds that were utilized for the said investment remains. There is no reason for it not to. The basis of the presumption as we will elaborate later is that an assessee would invest its funds to its advantage. It gains nothing by investing interest free funds towards other assets merely on account of the interest free funds having decreased. In that event so long as even after the decrease thereof there are sufficient interest free funds the presumption that they would be first used to invest in assets yielding exempt income applies with equal force.- Decided in favour of assessee

Summary

Issues involved:
1. Disallowance of interest payment on interest-free loans given to sister concern under section 36(1)(iii) of the Income Tax Act, 1961.
2. Disallowance of interest attributed under section 14A in case of positive cash flow.

Analysis:

Issue 1: Disallowance of interest payment on interest-free loans
The appellant-revenue filed ITA No.219 of 2013 against the order of the Income Tax Appellate Tribunal, challenging the disallowance of interest payment under section 36(1)(iii) on interest-free loans given to sister concerns. The Assessing Officer disallowed the interest payment, citing lack of commercial expediency in advancing interest-free loans. However, the Tribunal observed that the assessee had sufficient surplus interest-free funds available for investments and advances, which negated the need for disallowance under section 36(1)(iii). The Tribunal highlighted that in previous years, no disallowance was made on similar grounds, and the borrowed funds had no nexus with the interest-free advances. The Tribunal referred to case law and directed the deletion of the disallowance. The High Court upheld the Tribunal's decision, stating that the findings were not illegal or perverse.

Issue 2: Disallowance of interest attributed under section 14A
Regarding the disallowance of expenditure related to exempt income under section 14A, the High Court referred to a previous decision in a similar case where it was held that a decrease in interest-free funds does not automatically imply utilization of borrowed funds for investments yielding exempt income. The Court emphasized that as long as there are sufficient interest-free funds available for such investments, the presumption should be in favor of using those funds. The appellant-revenue failed to distinguish this precedent, leading to the dismissal of the appeals.

In conclusion, the High Court dismissed both appeals, as no substantial question of law arose in either issue. The judgments were based on thorough analysis of the facts, legal provisions, and relevant case law, ensuring a fair and reasoned decision in each matter.