2018 (5) TMI 434 - AT - Income Tax

Addition on account of diversion fund - amount of interest expense claimed by the assessee corresponding to the investment made in its sister concern was not eligible for deduction u/s. 36(1)(iii) - Held that - In the instant case, the AO has alleged that assessee has diverted its interest bearing fund by giving non-interest bearing advances to its sister concerns. AO made the disallowance of interest expenditure as claimed by assessee corresponding to the interest free advance made by it to its sister concerns. AO was reversed by Ld. CIT(A) by observing that own fund of assessee exceeds the amount invested in its sister concerns. It is undisputed fact that the own fund of assessee exceeds the amount of investment made in sister concerns as discussed in the order of CIT-A. Therefore, the presumption can be inferred that the own fund has been used in making the investment in sister concern. None of the investments in sister concerns had been made by the assessee out of borrowed funds. The ld. DR has also not brought anything on record contrary to the finding of ld. CIT-A. Therefore, there is no reason to make disallowance of the interest expense. - Decided against revenue.

Summary

Issues:
1. Disallowance of interest paid by the assessee.
2. Whether interest on borrowed funds is to be disallowed when funds are diverted for investment in shares of group companies.

Issue 1: Disallowance of interest paid by the assessee:
The Revenue appealed against the deletion of disallowance of interest paid by the assessee amounting to ?38,65,837, contending that the interest was not incidental to the business activity of the assessee. The AO disallowed the interest expense claimed by the assessee corresponding to the investment made in its sister concern, stating that the borrowed fund of ?2,57,72,250 had not been utilized for the business. However, the assessee argued that the investments were strategic and made from its own funds, exceeding the investment amount in the sister concern. The CIT(A) deleted the addition, emphasizing that no fresh investments were made, and the own funds of the assessee were sufficient for the investments. The Tribunal upheld the CIT(A)'s decision, citing various precedents, including judgments by the Bombay High Court and the Supreme Court, stating that the investments were not made from borrowed funds. The Tribunal dismissed the Revenue's appeal, concluding that there was no basis for disallowing the interest expense.

Issue 2: Disallowance of interest on borrowed funds diverted for investment in shares:
The Revenue argued that the CIT(A) erred in deleting the addition made by the AO for ?38,65,837 on account of diverted funds. The assessee, a private limited company holding Hyundai Motor dealership, had shown investments in sister concerns. The AO alleged that interest-bearing funds were diverted for investments in sister companies, leading to the disallowance of interest expenditure. However, the CIT(A) found that the own funds of the assessee exceeded the investments in sister concerns, indicating that borrowed funds were not utilized for investments. The Tribunal concurred with the CIT(A)'s findings, citing relevant judgments, and dismissed the Revenue's appeal. The Tribunal held that there was no diversion of funds and no basis for disallowing the interest expense claimed by the assessee.

In conclusion, the Appellate Tribunal upheld the CIT(A)'s decision to delete the disallowance of interest paid by the assessee, as the investments in sister concerns were made from the assessee's own funds and not from borrowed funds. The Tribunal dismissed the Revenue's appeal, emphasizing that the interest expenses were legitimate and incurred for business purposes, with no evidence of fund diversion.