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 […]
S. 36(1)(iii)
Garware Chemicals Ltd. v DCIT (IT APPEAL NO. 7819 (MUM.) OF 2010 dated 21.01.2015) Mumbai ITAT Background: The assessee is engaged in the business of manufacturing of various Petro Chemical products. During the assessment proceedings, the Assessing Officer noted that the assessee has claimed the deduction of Rs. 14 crore u/s 43B of Income Tax Act. The AO found that the claim of the assessee u/s 43B was in connection with the discharge of interest amount payable to IDBI amounting to Rs. 14 crore by way of conversion of the same into equity shares of the assessee company. The AO held that in view of the Explanation 3C of section 43B, the claim of the assessee is not allowable and accordingly rejected. The CIT(A) also did not accept the contention of the assessee and confirmed the disallowance made by Assessing Officer by following the decision of this Tribunal in the case of SRF Ltd. v. DCIT (34 SOT 1).
Allotment of equity shares in lieu of interest liability is a mode of payment allowable ...
M/s Eicher Motors Ltd v DCIT (ITA No.207 /Del /2013 dated 12.12.2014) – Delhi ITAT Background: The assessee incurred consultancy charges of Rs 20,36,319 for services rendered in relation to bid-cum-delisting of shares of Eicher Limited, a subsidiary company. During the course of assessment proceedings, the assessee submitted that the said expenses were incurred for acquisition of the entire controlling interest in subsidiary company – Eicher Limited since the assessee was a promoter of the said subsidiary and also has business interest in it. It was, further, submitted that the assessee being a promoter of Eicher Limited and holding business interest in that company, decided to acquire entire control over that company and, consequently, made an open offer to the public share-holders to acquire their shares and delist Eicher Limited from Stock Exchange for which services of J M Morgan Stanley Pvt. Ltd [Merchant Banker] and ILFS Investments Securities Limited [Syndicate Member] were obtained. Pursuant to the delisting of shares of Eicher Limited [after acquisition of shares from public share-holders], Eicher Limited was amalgamated with the assessee w.e.f. 4.3.2008 pursuant to the scheme of amalgamation being approved by the Hon’ble High Court of Delhi. However, the AO disallowed the expenditure holding that the expenditure was capital in nature as the same was incurred in relation to acquisition of a new asset. The CIT(A) confirmed the disallowance.
Expenditure incurred for acquisition of controlling stake in subsidiary is revenue in nature – Delhi ...
CIT v KAJAL EXPORTS [Tax Appeal No. 756 of 2013 dated 23.01.2014] (Gujarat High Court) Background: Assessee is engaged in business of export activities. During the course of assessment proceedings, the AO observed that the assessee had made borrowings throughout the year under the banner of business necessity and on review of the purchases and the sales patterns of the assessee, held that the funds borrowed were utilised for purposes other than business. The AO further noted that the assessee had advanced money to close relatives/ sister concerns without charging the interest. Accordingly, the AO disallowed the interest expenditure. CIT(Appeals) concluded that the borrowed funds were not used for the business purposes in the AY 2003-04 and the AO was justified in disallowing the expenditure on such borrowed funds to the extent it is claimed in the P&L account. The Tribunal deleted the entire amount except Rs.21,900/-, i.e. 15% of Rs.1.46 lakhs.
No disallowance of interest, if interest-free unsecured loans are sufficient to meet interest-free advances – ...
M/s GOLDEN TOBACCO LTD v Addln CIT ITA No.3198/Mum/2011; ITA No.5213/Mum/2010 dtd 26.06.2013 – Mum ITAT Background: Assessee has given interest-free advances to various sister concerns or other concerns totalling to Rs.2,68,61,882. Assessee during the course of assessment proceedings these advances are for business expediency or given out of its own funds. The AO did not accept the explanation of the assessee and observed that no explanation has been given in respect of Luster Print Media Limited and Dalmia Fresenius Limited. The AO considered these interest free loans as given for the purpose other than business. In respect of other parties also the A.O. noticed that the assessee has not given satisfactory reply in respect of interest free advances / loans. Therefore, he disallowed at the rate of 20% on the interest-free loans.
Where interest-free advances are made out of owned funds, no disallowance of interest can be ...
CIT v M/s Mahanagar Gas Limited [Income Tax Appeal No. 1978 of 2011] Dated : June 10, 2013 – Bombay High Court Background: Assessee filed its return of income for assessment year 2004-05 declaring a total income of Rs.100.76 crores. The Assessing officer noticed that the assessee had borrowed a sum of Rs.30 crores during the year and had paid total interest of Rs.613.26 lacs on the same. During the year, the assessee had invested an amount of Rs.4147 lacs in mutual funds. The Assessing Officer held that the borrowed funds were utilised for the purpose of investment in mutual funds and disallowed expenditure on account of interest under Section 36(1) (iii) on the ground that the above interest was not attributable to business carried on by the assessee.
Interest can’t be disallowed if investment is made from mixed funds (presuming sufficient own funds) ...
Ganjam Trading Co. (P.) Ltd. v DCIT ITA No: 3724 (MUM.) OF 2005, 932 (MUM.) OF 2006 and 1384 & 289 (MUM.) OF 2007] (Mum ITAT) Background: The assessee, in the business of trading and investment in goods, securities, etc., had declared income from interest, dividend and profit/loss from trading of shares. In the years under consideration, the assessee had declared huge losses from trading in shares which were treated by the Assessing Officer as speculation loss under the provisions of Explanation to section 73 of the Act. The assessee had also paid huge interest on borrowings. The Assessing Officer disallowed the interest relating to the investment made in shares under section 14A of the Income Tax Act, 1961 (for short “the Act”) and also disallowed interest on borrowings under section 36(1)(iii) of the Act holding that borrowings to that extent had not been utilised for the purpose of business. AO observed that the assessee had made huge borrowings on which substantial interest running into crores had been paid in all the years under consideration. The assessee had advanced the borrowed funds for allotment of shares of group companies. The assessee had also advanced Rs. 25 crores to Panther Invest-trade Ltd. for acquisition of equity shares of companies. The AO made disallowance u/s 36(1)(iii) by computing interest @ 15%. CIT(A) confirmed the disallowance of interest under section 36(1)(iii) for assessment years 2001-02 and 2002-03. In assessment year 2003-04, the CIT(A) observed that the assessee had substantial interest free funds amounting to Rs. 169.09 crores. He held that the disallowance of interest has to be worked out on proportionate basis after taking into account the total interest free funds and interest bearing funds and investments made.