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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI D.T.GARASIA, JM & SHRI RAJESH KUMAR, AM
आदेश / O R D E R
PER RAJESH KUMAR, A. M:
These are the two appeals filed by the assessee against the common order dated 24.9.2015 passed by the ld.CIT(A)-10, Mumbai for the assessment years 2010-11 and 2011-12 wherein the assessee has challenged disallowance of interest u/s 36(1)(iii) of Rs.19,80,465/- and Rs.27,07,904/- for the respective assessment year. Since, issue involved therein are common,
2 I. T . A . N o 5 6 3 1 a n d 5 6 3 2 / M u m / 2 0 1 5 therefore, these appeals are clubbed together, heard together and are being decided by this common order for the sake of convenience.
I.T.A. No.5631/Mum/2015
The only issue raised by the assessee against the upholding of disallowance of Rs.19,80,465/- u/s 36(1)(iii) on the ground that the advances given were not for the purposes of business and thus do not satisfy the conditions as laid down under section 36(1)(iii) of the Act.
Facts of the case are that the assessee filed return of income on 14.9.2010 declaring a total income of Rs.23,07,740/- which was processed under section 143(1) of the Act. Thereafter the case of the assessee was selected for scrutiny and notices u/s 143(2) and 142(1) were issued and served upon the assessee. During the course of assessment proceedings, the AO noticed that the assessee has given interest free advances to its subsidiary and sister concerns amounting to Rs.2,27,55,789/- and paid interest on the borrowings under the head finance charges to the tune of Rs.44,46,896/-. Accordingly a show cause notice was issued to the assessee calling upon it to explain as to why this interest paid on CC/OD should not be disallowed being interest bearing funds has been given free of interest to subsidiary companies, which was replied by the assessee by submitting that the assessee is having sufficient reserve funds to the tune of Rs.11.21 crores from preceding three years, besides its own share capital of Rs.1.00
3 I. T . A . N o 5 6 3 1 a n d 5 6 3 2 / M u m / 2 0 1 5 crore and therefore the said money was advanced out of own funds and from internal accruals by the assessee company. In support of this submissions the assessee relied upon the decision of the Hon’ble High Court in the case of Reliance Utility Ltd 331 ITR 340 (Bom). However, the reply of the assessee did not find favour of the AO and he, after brushing aside the contentions of the assessee, worked out the disallowance at Rs.19,80,465/- being 40% of the interest paid to bank on OD/CC of Rs.39,60,931/-. In the appellate proceedings, the ld. CIT(A) dismissed the appeal of the assessee after considering the submission and contention by observing and holding as under :
“4.2 I have carefully considered the facts of the case and the submissions made by the Id. AR. I have also gone through the decisions relied on by the Id.AR. The AO has disallowed 50% of the interest debited, on advances given to wholly owned subsidiary. The main reason for disallowance by the AO was that the appellant has diverted the fund without charging the interest from its subsidiary company, whereas on the other hand it paid interest on its borrowings. He felt that no prudent business man will divert the interest-bearing funds to other companies without charging any interest but the appellant has done so. Before me, the appellant has not controverted the fact that amounts were advanced to its sister concern without charging any interest.
4.2.1 While considering the issue on merits, the submissions and arguments of the appellant are noted. Before answering the grounds, let us see whether the action of the appellant can answer the following questions. i) Whether the amount borrowed, on which interest paid by the assessee, was used for the purpose of business of the assessee, so that interest debited can be allowed as business expenditure? [CIT vs. Calcutta Agency Ltd 19 ITO 191"(SC)
4 I. T . A . N o 5 6 3 1 a n d 5 6 3 2 / M u m / 2 0 1 5 ii) Whether there was a "commercial expediency" to advance loans to the concerns including sister concerns? [S.A.Builders Ltd vs. CIT 288 ITR 1 (SC)] iii) Whether there is a nexus between the funds borrowed and the funds advanced
4.2.2 With regard to the first question, the provision of the Act are very vocal that no interest u/s 36(1 )(iii) is allowed to claim as deduction if it is not related to the business of the appellant. The Id.AR's argument was that since the appellant was having sufficient own funds and the same were used for the purpose of advance to sister concerns, the borrowed funds were used by the appellant for its own business only and the interest debited is a business expenditure. I do not agree with this argument of the Id. AR. If the argument of the Id. AR that they are having sufficient own funds to run their business smoothly is true, then there is no need to approach a bank to borrow funds bearing interest burden. No doubt that the Revenue can not dictate the appellant how it should use its own funds arisen out of its internal accruals, but it definitely wants an answer as to why the appellant company has gone for borrowings from banks while on the other hand it has given interest free loans to its sister concern, more so when it has an interest burden on such borrowals. Thus the appellant fails to satisfy this question.
4.2.3 With regard to "commercial expediency" the appellant relied on the decision in the case of S A Builders(supra),and submitted that the amounts Were advanced to its sister concern for strengthening its financial position with which the business prospects of the appellant are inseparably linked, hence the said advances were made only due to business exigencies. However, it is not clear from the above how the appellant company derived any benefit out of such advances. Even if we take, for a while, that return benefit is not an essential requirement and it is sufficient if the holding company (appellant) has a deep interest in its subsidiary, the appellant should able to prove that the appellant's subsidiary sister company is sick or no' having regular funds and is in dire need of help from the appellant company. Further the sister company could have independently approached the banks for funds on the basis of the financial strength of the appellant company by giving collateral security. The same package of loans could have very well been obtained from the banks and individuals by the sister concern, instead of i-outing through the appellant company and during
5 I. T . A . N o 5 6 3 1 a n d 5 6 3 2 / M u m / 2 0 1 5 the interest burden on it. As stated earlier, the revenue cannot dictate how he business houses should behave, but onus is on them to explain the circumstances, more so when the appellant wants to claim an expenditure attached to it. Therefore I hold that the appellant in the instant case has failed to establish any "commercial expediency" for advancing interest-free loans to sister concerns. Hence, the decision of the Hon'ble Supreme Court in the case of S.A Builders Pvt Ltd ( supra) does not come to the rescue of the appellant. The appellant fails to answer this question also.
4.2.4 Last but not the least aspect is to see the nexus of funds. The Id.AR has argued that the AO has disallowed interest without establishing nexus between borrowed funds and the amount advanced to sister concern. It is to be understood that onus to prove nexus is on the appellant but not on the revenue. The whole funds will be in a common kitty and the appellant can not substantiate this fact as it can not separate clearly what funds have gone and where. The appellant is not sure of how the own funds and borrowed funds were utilized. With regard to nexus, the decision in the case of Abhishek Industries Ltd (286 ITR 1) which came to the rescue of the AO, states that ,
“As far as the issue of establishment of nexus of the funds borrowed vis-a-vis the funds diverted towards sister concern on interest free basis was concerned, the stand of the assessee that the onus of proving the nexus of funds available with the assessee with the funds advanced to the sister concerns without interest was on the revenue was not correct. Section 36(1 )(iii) provides for deductions of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of account, the onus will be en the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee, the same were used for business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the Assessing Officer to the effect that in spite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, still there was justification to advance loans to sister concerns for non-business purposes without any interest and, accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that 6 I. T . A . N o 5 6 3 1 a n d 5 6 3 2 / M u m / 2 0 1 5 extent. Even the plea of nexus of loans raised by the assessee with the funds advanced to the sister concerns on interest free basis might be pleaded to be out of sale proceeds or share capital or different account could not be accepted. [Para 14]".
It was further held in this judgment that,
“Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under section 36(1)(iii). Such borrowings to that extent cannot possibly be held for the purpose of business but for supplementing the cash diverted without deriving any benefit out of it. Accordingly, the assessee would not be entitled to claim deduction of the interest on the borrowings to the extent those were diverted to sister concerns or other persons without interest. [Para 38]
Thus the onus to prove that the borrowed funds have not been diverted is on the appellant. The onus was not discharged by it. It has also not explained why it necessitated to go for borrowings when own funds are available with it.
4.2.5 Above all, the Madras High Court in the cases of P.R.M.S. Ramanathan Chettiar v. CIT( 72 ITR 534) (Mad) and M.P.S.Raja v.CIT (105 ITR 295) (Mad), has held that interest paid on borrowed capital will be allowed as deduction only if the capital was used for the purpose of business. If it is used for a purpose other than that of its own business, then interest to that extent to which capital was so used, will not be allowed.
4.2.6 In view of the above discussion and judicial rulings, I feel that it would be the commercial impropriety to borrow funds bearing interest cost when sufficient own funds are available on hand. It is still improper to advance interest free loans to sister concerns when the company itself needs more money for running its business. The ground is, therefore dismissed”
7 I. T . A . N o 5 6 3 1 a n d 5 6 3 2 / M u m / 2 0 1 5
The ld. AR submitted before us that even the funds of the assessee Rs.20.66 crores including depreciation reserves of Rs. 7.72 Cr which has been mentioned by the ld. CIT(A) at page 3 of the appellate order, whereas the advances to the subsidiary companies were only to the tune of Rs.2.27 crores and therefore it should be presumed that the said funds were advanced out of the own funds of the assessee and no disallowance was called for. The ld. AR relied in defense of his arguments on the decision of Hon’ble Bombay High Court in the case of HDFC reported in 366 ITR 505 and Reliance Utilities(383 ITR 529) and also the decision in the case of SA Builders reported in. 288 ITR 1 (SC) . The Honb’le High Court has held that whether the holding company has deep interest in the subsidiary company and in that case advanced money by the holding company to the subsidiary company would not attract any disallowance and holding company would be entitled to interest on the borrowed funds. In the current year also the holding company has advanced money to subsidiary company for meeting its liability towards the expenses since it was the first year of the subsidiary and hence no disallowance ought to have been made. The ld. AR further submitted that the decision relied upon by the ld. CIT(A) in the case of Abhishek Industries Ltd (286 ITR 1) was rendered on 4.8.2006 whereas the decision of the Hon’ble Supreme Court in the case of S A Builder (supra) rendered on 14.12.2006. The Abhishek Industries Ltd (supra) has no more
8 I. T . A . N o 5 6 3 1 a n d 5 6 3 2 / M u m / 2 0 1 5 good law. Moreover, the decision in the case of Abhishek Industries Ltd (supra) are contrary to the decision of the Hon’ble High Court in the case of Reliance Utilities (supra) and HDFC(Supra) and therefore the decision in the case of Abhishek Industries Ltd (286 ITR 1) (supra) ought not to be followed.
On the other hand the ld. DR relied on the orders of the authorities below by submitting that the assessee has borrowed interest bearing funds which were advanced to the subsidiary company free of interest cost and therefore the disallowance of interest proportionately disallowed by the AO was correct and rightly upheld by the ld. CIT(A).
We have carefully considered the rival contentions and perused the material placed before us including the orders of authorities below and case laws relied by the parties. We find from the record before us that the assessee has sufficient own funds which were to the tune of Rs.22.66 crores whereas the money advanced to the subsidiary companies were only 2.67 crores and therefore the issue is squarely covered by the decisions of the Hon’ble Jurisdictional High Court in the case of HDFC Ltd (supra) and also by the decision in the case of Reliance Utilities (supra), wherein the presumption is taken that where assessee’s own funds are more than the advances given to the subsidiary company to control the function of the subsidiary company then no disallowance is justified. On the issue of the expression "commercial expediency" the case of the assessee is supported by the decision of the 9 I. T . A . N o 5 6 3 1 a n d 5 6 3 2 / M u m / 2 0 1 5 Hon’ble Supreme Court rendered in the case of S A Builder, (supra), wherein the Hon’ble Supreme Court has held that no disallowance of interest can be made in respect of interest on loan borrowed by the holding company which is advanced to the subsidiary company and deduction is admissible and allowable in the hands of the holding company. Respectfully following the same ratio of the above decision of the Hon’ble Supreme Court, we are of the considered opinion the order of the ld.CIT(A) is not correct and hence we set aside it and direct the AO to delete the disallowance.
The appeal of the assessee is allowed.
The issue raised in ground no.1 by the assessee is against the upholding of disallowance of Rs.27,07,904/- u/s 36(1)(iii) on the ground that the advances given were not for the purposes of business and thus does not satisfy the conditions as laid down under section 36(1)(iii) of the Act. This ground is identical to that of ground no.1 as decided by us in in favour of the assessee. Hence, the decision taken therein would apply ,mutatis mutandi, this ground also. Hence, ground no.1 is allowed.
The issue raised in the grounds of appeal no.2 is against the confirmation of disallowance under rule 8D(2)(ii) of Rs.2,98,649/- by the ld.CIT(A) as made by the AO in the assessment proceedings.
10 I. T . A . N o 5 6 3 1 a n d 5 6 3 2 / M u m / 2 0 1 5
Fact in brief are that the assessee has tax free income of Rs.41,03,700/- and the assessee has suo motu disallowed an amount of Rs.2,19,086/- u/s 14A which was later on revised by filing a fresh computation u/s 14A of the Act restricting the disallowance to Rs.47,957/-.
However, the AO worked out the disallowance u/s 14A at Rs.3,60,607/- as
per rule 8D(2) comprising Rs.2,98,649/- under rule 8D(2)(ii) and Rs.61,958/- under rule 8D(2)(iii). In the appellate proceedings, the ld. CIT(A) dismissed the appeal of the assessee by observing that the application of section 14A is mandatory and also that the assessee suo motu made disallowance of Rs.2,19,086/- while filing original return of income and lateron revised it to Rs.47,957/- and noted that there is no explanation/working of how these two figures were arrived at. The ld. CIT(A) also observed that the assessee has not followed the scientific formula provided under rule 8D and there is no dispute with regard to the applicability of section 14A of the Act.
We have carefully considered the rival contentions and perused the material placed before us. We find that the assessee has sufficient own funds and also interest bearing funds, therefore disallowance u/r 8D(2)(ii) to the tune of Rs.298649/- is required to be deleted in view of the decision in the case of HDFC Ltd (supra). It is not material point that the assessee has made suo motu disallowance at the time of filing of original return of income which 11 I. T . A . N o 5 6 3 1 a n d 5 6 3 2 / M u m / 2 0 1 5 was later on revised to lesser amount of Rs.47,957/-. Accordingly, we direct the AO to delete the disallowance. Whereas the disallowance u/s 8D(2)(iii) to the tune of Rs.61958/- was rightly made by the AO and confirmed by the FAA. Therefore, our interference is not called for on this issue. Accordingly we confirm the same.
Resultantly, the appeal bearing is partly allowed.
In the result, the appeal bearing no. 5631/M/2015 is allowed and is partly allowed.