Facts

The assessee had given interest free loans to its subsidiaries aggregating to the  sum of Rs.3,727.14 crores during the year under consideration. The Assessing Officer disallowed proportionate interest on such loans by treating the same as    not being incurred for the purpose of business. The Tribunal held that assessee  had sufficient interest-free funds and in fact, the net profit after tax and before depreciation for the year under consideration exceeded not only the differential/ incremental loan given to subsidiaries during the year but also exceeded the total interest free loans given to the subsidiaries. Accordingly, the Tribunal held that it could be presumed that the investments were made from the interest free funds available with the assessee and no disallowance was required under section 36(1)

• of the Act. The Bombay High Court agreed with the view of the Tribunal following earlier rulings of the same

Issue

Whether interest referable to funds given to subsidiaries is allowable as deduction under section 36(1)(iii) of the Act when the interest would not have been payable  to banks, if funds were not provided to subsidiaries? Whether, the interest paid  and referable to funds given to subsidiaries can be said to be incurred for the purpose of business so as to be allowable under section 36(1)(iii) of the Act? Where an assessee is having sufficient interest free funds at its disposal, can it      be presumed that the funds advanced to the subsidiary is out of the interest free funds?

View

Section 36(1)(iii) of the Act provides for deduction of interest expenditure which has been incurred for the purpose of business, meaning thereby the funds bearing interest are utilised for the purpose of business. If an assessee is paying interest    on any loan, the funds of which have been advanced to a group company, then unless the business of both the companies are linked and connected and the advancing of loan to the group company is proved to be for the purpose of business, interest on loan taken by the assessee isprone to disallowance for

not satisfying the conditions of section 36(1)(iii) of the Act. However, when the assessee is having sufficient interest free funds to take care of such advance to     the subsidiary, then the Courts have laid down that a presumption can be made that such advance is out of the interest free funds available with the assessee, thereby requiring no disallowance under section 36(1)(iii) of the Act. Sometimes, the interest free funds and the interest bearing funds of the assessee are mixed       in a common account, which is then utilised to make various payments, in which case, such presumption becomes inevitable. Such presumption was in fact accepted by the Apex Court incase of East India Pharmaceutical Works Ltd.

1. CIT [(1997) 224 ITR 627 (SC)] though in the facts of that case, no relief was granted to the assessee as no such argument was raised before the lower courts. Further, similar view was taken in an earlier judgment of the Calcutta High Court in Woolcombers of India Ltd. v.  CIT [(1982) 134 ITR 219 (Cal)(HC). Following   the above judgments, the Bombay High Court in case of CIT v. Reliance  Utilities  & Power Ltd. (2009) 313 ITR 340 (Bom)(HC), approved the theory of presumption, which is then followed in  number of  other judgments. Even otherwise, it  may be argued that the interest bearing funds are employed in the business so as to interest free funds to be utilised for any non-business purpose.

Held

The Apex Court dismissed the appeal of the Revenue held that, when interest-    free funds available with assessee is sufficient to meet investment, presumption     is that investments in subsidiaries were out of interest free funds, accordingly no disallowance can be made u/s. 36(1)(iii) (AY. 2003-04 to 2006-07) (CA No. 10 of 2019 dt. 2-1-2019)

Editorial: Order of the Bombay High Court in CIT (LTU) v. Reliance Industries Ltd. (ITA Nos. 1550/1592/1775 and1881 of 2014 dt. 22-08-2017 (2017) 86

taxmann.com 24 (Bom.)(HC) is affirmed. This judgment is also applicable in context of section 14A of the Act read with erstwhile Rule 8D(2)(ii), wherein common interest expenditure of the assessee is disallowed by attributing the same towards exempt income.

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will  be  no result.”

– Mahatma Gandhi