2024 (9) TMI 1436 - AT - Income Tax

Disallowance of interest - difference between the rate of interest paid on borrowed capital and the rate at which the amount was advanced to the wholly owned subsidiary - as argued merely because the assessee had agreed for the addition before the AO there is no estoppel against law and assessee had sufficient funds of its own - HELD THAT - We find the assessee in the instant case has advanced the amount to its wholly owned subsidiary which is not in dispute. The Hon ble Supreme Court in the case of S.A. Builders 2006 (12) TMI 82 - SUPREME COURT has held that where the funds are advanced by the holding company to its subsidiary and even if interest was not charged, advancing of funds to the wholly owned subsidiary would be for commercial expediency and no disallowance of interest is warranted. We find the Delhi Bench of the Tribunal in the case of Moonrock Hospitality Pvt. Ltd 2021 (9) TMI 1033 - ITAT DELHI while deciding an identical issue has held that where assessee had advanced the funds to its wholly owned subsidiary company for the purpose of business, no interest paid on borrowed funds could have been disallowed u/s.36(1)(iii) of the I.T. Act. Decision of Hon ble Supreme Court in the case of S.A. Builders 2006 (12) TMI 82 - SUPREME COURT and the decision of Moonrock Hospitality (P) Ltd. 2021 (9) TMI 1033 - ITAT DELHI we are of the opinion that no disallowance of interest paid on borrowed funds could have been disallowed. We, therefore, set-aside the order of the CIT(A) and direct the AO to delete the addition. Grounds raised by the assessee are accordingly allowed.

Summary

Issues Involved:
1. Disallowance of interest of Rs. 80,21,369/- made by the Assessing Officer.
2. Whether the assessee can contest an agreed addition before the CIT(A) and Tribunal.
3. Commercial expediency of advancing funds to a wholly owned subsidiary.

Detailed Analysis:

1. Disallowance of Interest:
The primary issue revolves around the disallowance of interest amounting to Rs. 80,21,369/-. The Assessing Officer (AO) noted that the assessee borrowed long-term funds at an interest rate of 12.16% per annum but advanced these funds to its wholly owned subsidiary at an interest rate of 12%. The AO disallowed the excess interest paid due to the difference in interest rates. The assessee argued that the interest charged to the subsidiary was justified and that it had sufficient interest-free funds to advance to the subsidiary. However, the CIT(A) upheld the AO's disallowance, stating that the AR of the assessee had agreed to the disallowance during assessment proceedings.

2. Contesting Agreed Addition:
The assessee contended that merely agreeing to an addition during assessment proceedings does not preclude it from contesting the addition in appeal. The CIT(A) rejected this argument, relying on case law which suggested that an agreed addition cannot be contested. However, the Tribunal noted that the Hon'ble Supreme Court in various decisions, including Bharat Heavy Electricals Ltd. vs. Mahendra Prasad Jakhmola & Ors, held that concessions on mixed questions of fact and law cannot decide cases and that the evidence as a whole must be weighed. The Tribunal also referenced decisions where it was held that a concession made by an authorized representative does not preclude the assessee from contesting the issue in appeal.

3. Commercial Expediency:
The Tribunal considered whether the advancement of funds to the wholly owned subsidiary was for commercial expediency. The assessee argued that the funds were advanced for business purposes and cited the decision of the Hon'ble Supreme Court in S.A. Builders Ltd., which held that advancing funds to a wholly owned subsidiary, even without charging interest, would be for commercial expediency and no disallowance of interest is warranted. The Tribunal agreed with this argument, noting that the assessee had advanced the funds to its wholly owned subsidiary, and thus, the disallowance of interest was not justified.

Conclusion:
The Tribunal found merit in the assessee's arguments and held that the CIT(A) was not justified in dismissing the appeal based on the agreed addition. It was concluded that the advancement of funds to the wholly owned subsidiary was for commercial expediency, and therefore, no disallowance of interest was warranted. The Tribunal set aside the order of the CIT(A) and directed the AO to delete the addition of Rs. 80,21,369/-. The appeal filed by the assessee was allowed.