TATA MOTORS LTD.,MUMBAI vs. DCIT RG 8(3), MUMBAI

per the guidelines issued by RBI to NBFC companies. It is the contention of the assessee that though the assessee has given loans and advances over and above prescribed limit provided, still, the Explanation to section 37(1) applies only to any expenditure which is not an expenditure covered under sections 30 to 36 and which is in the nature of expenditure incurred for any purpose which is an offence or which is prohibited by law. The assessee has paid interest on borrowings which is eligible for deduction u/s 36(1)(iii) and hence, there is no reason to disallow such expenditure by invoking Proviso to section 37(1) of I.T. Act, 1961.

33. We have heard both the parties and perused the material on record.

The AO made disallowance of interest @12% on total loans and advances given to a subsidiary company on the ground that the assessee has contravened provisions of RBI guidelines and any expenditure incurred on such loans and advances is in the nature of expenditure incurred for any purpose which is an offence or which is prohibited by law and hence, not allowable as deduction. The AO made disallowance of Rs.57,79,00,000 being interest @12% p.a. on the amount of Rs.48,159.54 crores of loans and advances given to subsidiary company. The AO has calculated notional interest on said loans and advances and disallowed u/s 37(1) of the Act. It is not a case of AO that the assessee has paid any fine or penalty for contravention of RBI guidelines issued to NBFCs for not following prudential norms. The AO also not brought out any facts with regard to the violation of any law and the RBI has passed any order imposing penalty or fine on the assessee. The AO has taken a clue from the Notes to Accounts given by the assessee in its financial statements, which states that the assessee has given loans and advances to a single entity in 24 Tata Motors contravention of RBI guidelines issued to NBFCs. Except this, nothing has been brought on record to indicate that the assessee has incurred an expenditure of Rs.57.79 crores in contravention of RBI guidelines which comes within the ambit of Proviso to section 37(1) of the Act. The AO has not brought any materials against the assessee to prove that the RBI has passed any orders imposing fine or penalty. On the other hand, the assessee has filed enough evidence before the AO to prove that the guidelines issued by the RBI is only advisory in nature and any contravention of such guidelines can be cured by making an application before RBI for condonation of such violations using its powers.

Therefore, we are of the considered view that disallowing notional interest on borrowings for the simple reason that the assessee has violated directives issued by RBI without any contrary materials to prove that the assessee has incurred such expenditure for contravention of the provisions of the Act is incorrect. Therefore, we are of the considered view that the AO was erred in disallowing interest expenditure of Rs.57.79 crores u/s 37(1) of the Act. The Ld.CIT(A), after considering relevant submissions, has rightly deleted addition made by the AO. We do not find any error in the order of Ld.CIT(A). Hence, we are inclined to uphold the finding of Ld.CIT(A) and reject ground taken by the revenue.

25 Tata Motors allowed. Order pronounced in the open court on 21st August, 2018.