2020 (10) TMI 800 - HC - Income Tax

Disallowance u/s 36(1)(iii) - disallowing the proportionate part of the interest the Assessee Company paid to its Bank, under Section 36(1)(iii) - Assessee Company while having majorly only borrowed funds from its Banks and paid interest thereon, diverted substantial part of those funds to its Subsidiary Company and did not charge any interest thereon - HELD THAT - Hon'ble Supreme Court in the case of Commissioner of Income Tax v. Reliance Industries Limited 2019 (1) TMI 757 - SUPREME COURT in which held that if any Assessee has got Surplus Funds exceeding the advances made to its Subsidiaries, a presumption could be made that interest bearing Funds have not been diverted to its Subsidiary Company. Having heard the learned counsel for the parties, we are of the opinion that the matter is required to be remanded back to the Assessing Authority for holding enquiry into the matter as to whether the interest bearing borrowed funds were used for advancing loan to the Subsidiary Company or the Surplus Funds of the Company were so diverted. It was a case of unpaid sale price for transfer of of the Sodium Perborate Division made by the Assessee Company to its Subsidiary Company M/s.Chemasia Industries Limited and the outstanding loan liability to the 7.88 crores was also taken over by the Assessee Company. Therefore, even though borrowed funds might have been diverted, but the fact remains that the Assessee did not charge any interest on such unpaid price from the Subsidiary Company and even took over another loan liability of the Subsidiary Company. Matter deserves to be remanded to the Assessing Authority for holding an enquiry into this aspect of the matter and then consider the question of disallowance under Section 36(1)(iii).

Summary

Issues Involved:
1. Disallowance under Section 36(1)(iii) of the Income Tax Act for diversion of interest-bearing funds to a sister concern without charging interest.
2. Sufficiency of own funds to cover interest-free advances to sister concerns.
3. Necessity of remanding the case to the Assessing Authority for further enquiry.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 36(1)(iii) of the Income Tax Act:
The primary issue revolves around whether the disallowance of ?4.43 crores under Section 36(1)(iii) of the Income Tax Act is justified. The Assessing Officer (AO) found that the assessee had borrowed funds and paid interest on them while also providing interest-free loans to its sister concerns, amounting to ?19.74 crores as of 31.03.2012. The AO disallowed a proportionate interest payment, arguing that the expenditure was not incurred wholly and exclusively for business purposes under Section 36(1)(iii).

2. Sufficiency of Own Funds:
The Tribunal and the Commissioner of Income Tax (Appeals) (CIT(A)) had previously ruled in favor of the assessee, citing that the assessee had sufficient own funds exceeding the advances made to sister concerns. The Tribunal relied on its earlier decision for the Assessment Year 2008-09, where it was established that the assessee had share capital and reserves far exceeding the interest-free advances. The Tribunal cited higher judiciary decisions, such as CIT Vs. Reliance Utilities And Power Ltd. and CIT Vs. Bharti Televenture Ltd., which held that if an assessee has sufficient own funds, interest expenditure cannot be disallowed on the premise that interest-bearing funds were diverted.

3. Necessity of Remanding the Case:
The High Court noted that the Tribunal had only relied on its previous decision without examining the specific facts of the current assessment year. The court emphasized the need for a detailed enquiry into whether the interest-bearing borrowed funds were used for advancing loans to the subsidiary or if surplus funds were used. The court highlighted that the unpaid sale price for the transfer of the Sodium Perborate Division to the subsidiary and the assumption of a loan liability by the assessee were critical factors that needed examination. The court remanded the case back to the Assessing Authority for a thorough enquiry into these aspects.

Conclusion:
The High Court set aside the orders of the Tribunal, CIT(A), and AO for the Assessment Year 2012-2013. The case was remanded to the Assessing Authority to conduct a detailed enquiry into the source of funds used for the interest-free advances and to reconsider the disallowance under Section 36(1)(iii) based on the findings. The court directed that fresh orders be passed within one year, ensuring a fair hearing for the assessee. No order as to costs was made.