2020 (10) TMI 247 - AT - Income Tax

Interest on borrowed funds not utilised for business purposes of the assessee - Disallowance u/s.36(1)(iii) or alternatively u/s.14A - interest free funds available with the assessee were much more than the investments made by the assessee in subsidiary companies OR not? - whether borrowed funds were utilised in equity of subsidiaries and thus the assessee is entitled to dividend income therefrom which is exempt u/s.10(34) ? - HELD THAT - AO has disallowed the interest on the entire investment though according to the assessee, the cash credit account contains both interest free as well as interest bearing funds. As held in SA Builders 2006 (12) TMI 82 - SUPREME COURT where the interest free funds and interest bearing funds are mixed and the assessee makes investments in sister concern, it is to be presumed that such investments are out of interest free funds only and there cannot be any disallowance of interest on borrowed funds. Though the assessee has filed before us, the financial statements as on 31st March, 2010 to show that the interest free funds available with it at the time of investments, were much more than the investments made by the assessee, we are of the opinion that it needs verification by the AO. We remit the appeal to the AO for the limited purpose of verification of AO s own and interest free funds available and if the AO finds that the assessee s own and interest free funds were much more than the investments made by the assessee, then no disallowance shall be made by the AO and if it is found that such funds are not sufficient, then, disallowance shall be made only to the extent of funds utilised for investment over and above the own funds available with the assessee. Appeal of assessee is treated as allowed for statistical purposes.

Summary

Issues:
1. Disallowance of interest on borrowed funds invested in subsidiaries under sections 36(1)(iii) and 14A of the Income Tax Act.
2. Verification of funds utilized for investments in subsidiaries.

Analysis:
1. The appellant, a television content production and broadcasting company, filed its return for AY.2010-11 showing a loss. The Assessing Officer (AO) disallowed interest on borrowed funds invested in subsidiaries, citing sections 36(1)(iii) and 14A of the Act. The AO's decision was based on the utilization of borrowed funds for share application money in subsidiaries. The appellant contended that investments were for commercial expediency, relying on legal precedents. The AO disallowed the interest at 17.5%, following a Special Bench decision. The CIT(A) partially upheld the disallowance, considering the source of funds and investments. The appellant appealed against this order.

2. During the hearing, the appellant argued that its own funds exceeded the investments in subsidiaries, citing relevant court decisions. The appellant emphasized that where interest-free and interest-bearing funds are mixed, investments are presumed to be from interest-free funds. The Tribunal found merit in the appellant's argument but remitted the case to the AO for verification of funds availability at the time of investments. The Tribunal directed that if the appellant's own and interest-free funds exceeded the investments, no disallowance should be made. Otherwise, disallowance should be limited to the excess investment over available funds.

3. For AYs 2011-12, 2012-13, and 2013-14, similar issues arose. The Tribunal treated all appeals of the appellant as allowed for statistical purposes based on the findings in the AY 2010-11 appeal. In the Revenue's appeals for these years, the Tribunal dismissed the appeals for AYs 2011-12 and 2013-14 due to the tax effect being below the CBDT limit and the availability of interest-free funds. The Revenue's appeal for AY 2012-13 was also dismissed as the own funds of the appellant exceeded the investments.

4. In conclusion, the Tribunal allowed all appeals of the appellant for statistical purposes and dismissed all appeals of the Revenue. The decision was pronounced on 30th September 2020.