LAQSHYA MEDIA LIMITED,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX - CIRCLE 10(2)(1), MUMBAI, MUMBAI

The solitary grievance of the assessee is against the disallowance of interest paid under section 36(1)(iii) of the Act.

The brief facts of the case pertaining to this issue, as emanated from the record, are: The assessee is engaged in the business of outdoor media advertisement services. For the year under consideration, the assessee filed its return of income on 30.11.2017, declaring a total income of ₹ 37,20,080. The return filed by the assessee was selected for scrutiny, and statutory (A.Y. 2017-18) 3 notices under section 143(3) and section 142(1) of the Act were issued and served on the assessee. During the assessment proceedings, upon perusal of the books of accounts of the assessee, it was observed that the assessee has paid a total interest of ₹ 2,55,38,048/- during the year under consideration. It was further observed that as on 31.03.2017, the outstanding balance of the interest-bearing loans amounted to ₹ 26.68 crore, including the term loan of ₹ 10.53 crore availed by the assessee. Further, it was observed that during the year under consideration, the assessee has not advanced any interest- free loans to its subsidiary companies. Thus, it was noted that the total amount of interest-free loans advanced to the subsidiaries as on 31.03.2017 was ₹ 27.94 crores, which was granted in earlier years. Accordingly, the assessee was asked to explain why the disallowance of interest under section 36(1)(iii) of the Act should not be made. In response, the assessee submitted that the loan advanced to the subsidiary companies is out of interest-free funds available with the assessee. The assessee further submitted that the term loan secured by the assessee was for acquiring/installation of media assets, repayment of other loans and interest and for acquiring vehicles. Further, the working capital loan of ₹ 16.15 crore was taken by the assessee to fund the current assets of the company. The assessee also submitted that it has an operating cash inflow of ₹ 25.59 crore during the year under consideration. The assessee further submitted that the interest-free loan was advanced to the subsidiaries, which are also in the same line of business, and thus, the loan was advanced for business purposes.

The Assessing Officer (“AO”) vide order dated 24.12.2019 passed under section 143(3) of the Act disagreed with the submissions of the assessee and held that the assessee has not been able to justify its argument that no nexus exists between interest-free advances and interest-bearing borrowed funds.

The learned CIT(A), vide impugned order, granted partial relief to the assessee and directed the AO to reduce the disallowance by the amount already disallowed by the assessee under section 43B. Further, the learned CIT(A) also directed the AO to exclude various items of interest while calculating the interest disallowance, as mentioned in paragraph 4.2 of the impugned order. Being aggrieved by the part disallowance of the interest paid under section 36(1)(iii) of the Act, the assessee is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. In the present case, the details of interest-free and interest-bearing loans and advances given by the assessee to its subsidiary companies are as follows: -

Thus, the opening balance of interest-free loan and advances by the assessee to its subsidiary companies as on 01.04.2016 was ₹ 32,36,55,341. Out of the same, the assessee received interest-free loan of ₹ 4.43 crore during the under consideration. Thus, the total amount of outstanding interest-free loans advanced to the subsidiary company as on 31.03.2017 was ₹ 27,93,55,341. From the aforesaid details, as taken note by the AO in the assessment order, it is further evident that during the year under consideration, the assessee advanced interest-bearing loans to its subsidiary companies amounting to ₹ 6,14,50,000. Except for the aforesaid loan, it is evident that all other loans were interest-free loans and the same were advanced to the subsidiary companies in the preceding years.

During the hearing, the learned Authorised Representative (“learned AR”) submitted that a similar disallowance under section 36(1)(iii) of the Act has been made by the AO in assessee’s own case since the assessment year 2010-11. By referring to the orders passed by the Co-ordinate Benches of the Tribunal in assessee’s own case in preceding assessment years, forming part of the paper book from pages 162-255, the learned AR submitted that the disallowance made under section 36(1)(iii) of the Act was deleted by the Co- ordinate Benches of the Tribunal. The learned AR further submitted that the Department’s appeal against the Tribunal’s order for the assessment year 2010-11 was dismissed on this issue, and the findings of the Tribunal were (A.Y. 2017-18) 6 upheld vide order dated 23.01.2025 passed by the Hon’ble Jurisdictional High Court in of 2018.

We find that the Co-ordinate Bench of the Tribunal in assessee’s own case in M/s. Laqshya Media Ltd. vs. DCIT, in vide order dated 17.07.2020, following the decision rendered in assessee’s own case for the assessment year 2013-14, deleted the similar disallowance made under section 36(1)(iii) of the Act, by observing as follows:- “24. Ground No. 5 relates to disallowance of interest under section 36(1)(iii) of the Act. During the assessment, the AO noted that assessee has incurred interest of Rs. 6.71 crore. It was further noted that the assessee has advanced interest free loan to its subsidiary. The AO issued show-cause notice for interest disallowance under section 36(1)(iii). The assessee filed detailed submission vide reply dated 30.11.2017 as recorded in para-7.2 of the draft assessment order. In the reply the assessee submitted that the advance to the subsidiaries was given for commercial expediency and that the assessee had sufficient interest free funds available with it. The AO disregarded the contention of the assessee. The AO made disallowance under section 36(1)(iii) by taking view that assessee is unable to justify the commercial necessity for making interest free advances to its subsidiaries nor been able to substantiate beyond doubt that advance had been made from own funds. The AO disallowed Rs. 64,95,182/-. The DRP confirmed the action of the AO by following the order of earlier years.

The learned A.R. of the assessee submitted that this issue has been raised in appeal in previous assessment years wherein the Tribunal has held that no disallowance under Section 36(1)(iii) of the Act is warranted wherein the interest free loans advanced to the subsidiaries were out of commercial expediency. Thus, this ground of appeal

The dispute resolution panel following its earlier decision upheld the assessing officer's action. Against this order assessee is in appeal before the ITAT.

We have heard both the sides and perused the records. Learned counsel of the assessee reiterated that in assessee's own case ITAT for assessment year 2009 - 10 to assessment year 2012 - 13 has held that no disallowance in this regard is warranted as the interest free loan advanced to the subsidiaries was out of commercial expediency. Furthermore, the tribunal had also held that assessee's interest free funds to grant loans were sufficient and in this regard it had placed reliance upon Hon 'ble Bombay High Court decision in the case of CIT vs HDFC bank. In these circumstances learned counsel contended that no disallowance in this regard is warranted. He further contended that facts are identical and assessee's interest free funds are more than the advances given to AE's.

Upon careful consideration we find that since facts are identical and DRP has also followed its earlier year order which has been reversed by the ITAT, respectfully following the above said precedent we direct that no disallowance in this regard is to be made. 28. Respectfully following the decision of the Coordinate Bench in earlier assessment years, wherein it was held that the assessee has sufficient interest free funds available with it and the advances was given for commercial expediency; hence we are in agreement with the submissions of the assessee that this ground of appeal is covered in favour of the assessee. Hence, we are inclined to delete the addition/disallowance under Section 36(1)(iii) of the Act. No contrary fact or law is brought to our notice. Ins the result this Ground of appeal is allowed.”

During the hearing, the learned AR also placed reliance upon the decision of the learned CIT(A) in assessee’s own case for assessment year 2015-16, wherein a similar disallowance was deleted, following the judicial precedent in assessee’s own case in preceding years. The learned AR further submitted that the Revenue has not filed any appeal against the aforesaid findings of the learned CIT(A) for the assessment year 2015-16.

In the present case, it is an undisputed fact that during the year under consideration, no interest-free loans were advanced by the assessee to the subsidiary companies and all the interest-free loans were granted in the preceding years. Therefore, respectfully following the decisions of the Co- ordinate Bench of the Tribunal rendered in assessee’s own case in preceding (A.Y. 2017-18) 8 years, the disallowance made under section 36(1)(iii) of the Act is deleted. As a result, the grounds raised by the assessee are allowed.

In the result, the appeal by the assessee is allowed.