No disallowance u/s 36(1)(iii) / 14A where interest-free funds are sufficient to cover interest-free loans / investments – SC


CIT v Reliance Industries [2019] 410 ITR 466 (SC)

Facts:

  • Assessee had given interest-free loans to its subsidiaries as on 31-03-2003 aggregating Rs. 6,716.12 crores and as on 31-03-2002 was 2,988.98 crores; thus the incremental loans given during the year amounted to Rs. 3,727.14 crores.
  • The net profit after tax and before depreciation exceeded not only the differential/incremental loan given to subsidiaries during the year but also exceeds the total interest free loans of Rs. 6,716.12 crores given to the subsidiaries as on 31-3-2003.

Bombay High Court’s decision:

  • It is already settled principle by this Court in the case of Reliance Utilities & Power Ltd that if there were funds available both interest free and overdraft / or loans taken, then presumption would arise that investment would be out of interest free funds generated or available with the company.
  • It was held that if interest free funds were sufficient to meet the investments made, in that case a presumption is established that the borrowed capital was used for the purpose of business and the interest expenditure is deductible under section 36(1)(iii) of the Act.
  • The Tribunal held that the interest free fund available to the assessee is sufficient to meet its investment. It can be presumed that investments were made from interest free funds available with the assessee. This position clearly emerges from the record and for the current assessment year as well.
  • There is no perversity when nothing contrary to the factual material was brought on record by the Revenue.

Supreme Court’s decision:

The High Court has noted the finding of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee. The Tribunal has also followed its own order for Assessment Year 2002-03. In view of the above findings, we find no reason to interfere with the judgment of the High Court.

NOTE:

  • The controversy in relation to disallowance u/s 36(1)(iii) / 14A in relation to allowability of interest cost is long drawn.
  • This Apex Court ruling upholds the principle of presumption of investment out of owned funds in a scenario where there is a mixed pool of funds and it is difficult to identify specific cost incurred in relation to interest-free advances / investments.
  • It is pertinent to note that in the Apex Court ruling in the case of Maxopp Investment / Avon Cycles [2018] 402 ITR 640 (SC), the assessee had suo motu offered disallowance of interest cost before ITAT (where there were mixed pool of funds) by apportioning part of the interest cost towards investment. Supreme Court in that case had remarked that after applying the principle of apportionment, it did not find any merit in the appeal. No particular reference is made to the aforesaid decision in the instant case.
  • However, it is relevant to note that Supreme Court, in its earlier rulings also, in the case of East India Pharmaceutical Works Ltd. and Munjal Sales Corpn had found force on the principle of presumption of investments being out of own funds.

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