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2024 (9) TMI 736 - AT - Income TaxDisallowance of interest - appellant company had borrowed interest bearing loan funds and advanced interest free funds to its sister concern - HELD THAT -The Hon'ble Supreme Court in the case of CIT vs. Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT has held that when the interest-free funds available to the assessee were sufficient to make investment, it could be presumed that the investments were made from the interest-free funds available with the assessee and therefore, interest referable to the funds given to the subsidiaries is allowable as deduction u/s 36(1)(iii) of the Act. We find that, following the above decision and various other decisions, case of South Indian Bank Ltd 2021 (9) TMI 566 - SUPREME COURT has held that if investments in tax-free securities are made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax-free securities, in such cases, disallowance of interest u/s 14A of the Act cannot be made. Since, admittedly the assessee in the instant case is having sufficient own capital and free reserves surpluses which far exceeds the amount of interest free advance given to the sister concern, therefore, we are of the considered opinion that no disallowance of interest u/s 36(1)(iii) of the Act is called for. Assessee appeal allowed.
Issues Involved:
1. Disallowance of interest expenditure of Rs. 52,59,935. 2. Disallowance of Rs. 45,00,000 in respect of compensation paid towards cancellation of agreement to sale of land. Issue-wise Detailed Analysis: 1. Disallowance of Interest Expenditure of Rs. 52,59,935: The primary issue revolves around the disallowance of interest expenditure amounting to Rs. 52,59,935 made by the Assessing Officer (A.O.) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)], on the grounds that the assessee had advanced interest-free funds of Rs. 14 crores to its sister concern, while simultaneously incurring interest expenses on borrowed funds from the bank. Facts and Arguments: - The assessee, a private limited company, filed its return of income declaring a total income of Rs. 67,11,697, which was set off against brought forward losses, resulting in a taxable income of Nil. - The case was selected for scrutiny to verify specific issues including a low PBDIT ratio and large business expenses. - The A.O. noted that the assessee had advanced Rs. 14 crores to M/s. Anishka Developer Pvt. Ltd. as an interest-free loan while paying interest on borrowed funds from YES Bank. - The A.O. disallowed the interest expenditure on the grounds that the assessee failed to justify the bonafide nature and purpose of the advance given to Anishka Developers. - The CIT(A) upheld the A.O.'s decision, citing the assessee's failure to establish a direct nexus between interest-free funds available and the loan given to the sister concern. Legal Precedents and Tribunal's Decision: - The assessee argued that its own capital and free reserves as on 31.03.2021 were Rs. 44.59 crores, far exceeding the Rs. 14 crores advanced, and thus the disallowance was unjustified. - The assessee cited the Supreme Court decisions in Reliance Industries Ltd. [410 ITR 466(SC)] and South Indian Bank Ltd. v. CIT [(2021) 438 ITR 1], which held that when interest-free funds available are sufficient to cover the advances, it can be presumed that the advances were made from such funds. - The Tribunal found merit in the assessee's arguments, noting that the own capital and free reserves were indeed sufficient to cover the interest-free advance. - The Tribunal concluded that no disallowance under Section 36(1)(iii) of the Income Tax Act was warranted, setting aside the CIT(A)'s order and directing the A.O. to delete the addition. 2. Disallowance of Rs. 45,00,000 in Respect of Compensation Paid: The second issue pertained to the disallowance of Rs. 45,00,000 paid by the assessee as compensation towards the cancellation of an agreement to sell land owned by its subsidiary company. Facts and Arguments: - The assessee contended that the payment was made for business purposes and was not claimed as a deduction by its subsidiary, thus there was no reason for disallowance. - However, during the hearing, the assessee did not press this ground of appeal. Tribunal's Decision: - The Tribunal dismissed this ground of appeal as 'not pressed', aligning with the assessee's stance during the hearing. Conclusion: The Tribunal allowed the appeal partly, specifically in favor of the assessee concerning the disallowance of interest expenditure of Rs. 52,59,935, while dismissing the ground related to the compensation payment as it was not pressed by the assessee. The Tribunal's decision was pronounced in the open court on 9th September, 2024.
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