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TMI Blog2017 (3) TMI 1254X X X X Extracts X X X X X X X X Extracts X X X X ..... companies, the assessee was left with surplus interest free funds of ₹ 53.86 crores which were utilized for giving interest free advances. Thus, there was no nexus of interest expenditure incurred during the year with the aforesaid loans/advances given to the subsidiary companies, warranting disallowance under section 36(1)(iii) of the Act. After considering the relevant provisions and the case law on the point, the Tribunal correctly deleted the disallowance of interest expenditure made under section 36(1)(iii) of the Act. - Decided in favour of assessee Addition u/s 14A - Expenditure related to exempt income - Held that:- The issue is covered by the decision in the case of the assessee in Commissioner of Income Tax, Jalandhar I, Jalandhar vs. M/s Max India Limited [2016 (11) TMI 1012 - PUNJAB AND HARYANA HIGH COURT] as held Merely because the interest free funds with the assessee have decreased during any period, it does not follow that the funds borrowed on interest were utilized for the purpose of investing in assets yielding exempt income. If even after the decrease the assessee has interest free funds sufficient to make the investment in assets yielding the exempt in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 2013 may be noticed. The assessee-company is deriving its income from manufacturing and marketing of biaxially oriented polypropylenes (BOPP) films, a flexible packaging material. Assessment was completed under section 143(3) of the Act at an assessed loss of ₹ 1,11,95,249/- on 29.12.2010 against the returned income as declared loss of ₹ 6,30,65,443/- e-filed on 28.9.2008. Additions/disallowances were made on account of interest under section 36(1)(iii) of the Act on interest free advances to subsidiaries amounting to ₹ 1,45,91,805/- and expenditure related to exempt income amounting to ₹ 3,65,28,393/- under section 14A of the Act. The Assessing Officer noticed that while the assessee company was paying interest on its loan taken, it had advanced interest free loans to its sister concerns/subsidiaries aggregating ₹ 297.83 lacs including advance of ₹ 704.51 lacs during the previous year upto the end of the relevant year. These advances remained outstanding in the name of the subsidiaries throughout the year and there was no business transaction of any nature with the subsidiaries involved against the advance given to these concerns. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d advances given to the said three subsidiary companies in the earlier years. After perusing the cash flow statement of the assessee company for the assessment year in question, the Tribunal observed that the assessee company had received substantial proceeds from preferential issue of shares capital amounting to ₹ 99999.98 lacs. It had also received dividend income of ₹ 166.13 crores from various investments. After giving interest free loans of ₹ 7.04 crores to its subsidiary companies, the assessee was left with surplus interest free funds of ₹ 53.86 crores which were utilized for giving interest free advances. Thus, there was no nexus of interest expenditure incurred during the year with the aforesaid loans/advances given to the subsidiary companies, warranting disallowance under section 36(1)(iii) of the Act. After considering the relevant provisions and the case law on the point, the Tribunal deleted the disallowance of interest expenditure made under section 36(1)(iii) of the Act. The relevant findings recorded by the Tribunal read thus:- 25. We have perused the cash flow statement of the assessee company for the assessment year under consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, without going into the issue whether such funds were sufficient to cover up interest free advances in those years, which prima facie appears to be available, we are of the view that since no disallowance of interest expenditure attributable to the interest free loans/advances given to the subsidiary companies was made under section 36(1)(iii) of the Act, in those years, it was not open to the Assessing Officer to make such disallowance in the succeeding assessment year. We draw support for the aforesaid decision from the judgments of the Hon ble Karnataka High Court in the case of CIT vs. Sridev Enterprises reported in 192 ITR 165 and the decision of the Hon ble Delhi High Court in the case of CIT vs. Givo Limited in ITA No.941/2010. In that view of the matter, having held that the borrowed funds had no nexus with interest free advances given to the subsidiary companies in earlier years (on account of no disallowance having been made in the assessment of earlier years) and during the relevant assessment year (on account of positive overall cash flow statement of the relevant year), it is not necessary to go into the issue whether interest free advances given by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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