{"id":13308,"date":"2020-10-26T11:20:41","date_gmt":"2020-10-26T11:20:41","guid":{"rendered":"https:\/\/itatonline.org\/digest\/cit-ltu-v-reliance-industries-ltd-2019-410-itr-466-175-dtr-1-307-ctr-121-261-taxman-164-sc\/"},"modified":"2020-10-26T11:20:41","modified_gmt":"2020-10-26T11:20:41","slug":"cit-ltu-v-reliance-industries-ltd-2019-410-itr-466-175-dtr-1-307-ctr-121-261-taxman-164-sc","status":"publish","type":"post","link":"https:\/\/itatonline.org\/digest\/cit-ltu-v-reliance-industries-ltd-2019-410-itr-466-175-dtr-1-307-ctr-121-261-taxman-164-sc\/","title":{"rendered":"CIT (LTU) v. Reliance Industries Ltd. (2019) 410 ITR 466\/175 DTR 1\/307 CTR 121\/261 Taxman 164 (SC)"},"content":{"rendered":"<h3>Facts<\/h3>\n<p>The assessee had given interest free loans to its subsidiaries aggregating to the \u00a0sum 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\u00a0\u00a0\u00a0 not being incurred for the purpose of business. The Tribunal held that assessee\u00a0 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)<\/p>\n<ul>\n<li>of the Act. The Bombay High Court agreed with the view of the Tribunal following earlier rulings of the same<\/li>\n<\/ul>\n<p>\u00a0<\/p>\n<h3>Issue<\/h3>\n<p>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\u00a0 to banks, if funds were not provided to subsidiaries? Whether, the interest paid\u00a0 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\u00a0\u00a0\u00a0\u00a0\u00a0 be presumed that the funds advanced to the subsidiary is out of the interest free funds?<\/p>\n<p>\u00a0<\/p>\n<h3>View<\/h3>\n<p>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\u00a0\u00a0\u00a0 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<\/p>\n<p>\u00a0<\/p>\n<p>\u00a0<\/p>\n<p>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\u00a0\u00a0\u00a0\u00a0 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\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 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 <strong><em>East India Pharmaceutical Works Ltd.<\/em><\/strong><\/p>\n<ol>\n<li><strong><em> CIT [(1997) 224 ITR 627 (SC)<\/em><\/strong>] 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 <strong><em>Woolcombers of India Ltd. v.\u00a0 CIT [(1982) 134 ITR 219 (Cal)(HC)<\/em><\/strong>. Following\u00a0\u00a0 the above judgments, the Bombay High Court in case of <strong><em>CIT v. Reliance\u00a0 Utilities\u00a0 &amp; Power Ltd. (2009) 313 ITR 340 (Bom)(HC)<\/em><\/strong>, approved the theory of presumption, which is then followed in\u00a0 number of\u00a0 other judgments. Even otherwise, it\u00a0 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.<\/li>\n<\/ol>\n<p>\u00a0<\/p>\n<h3>Held<\/h3>\n<p>The Apex Court dismissed the appeal of the Revenue held that, when interest-\u00a0\u00a0\u00a0 free funds available with assessee is sufficient to meet investment, presumption\u00a0\u00a0\u00a0\u00a0 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)<\/p>\n<p><strong><em>Editorial: <\/em><\/strong>Order of the Bombay High Court in <strong><em>CIT (LTU) v. Reliance Industries Ltd. (ITA Nos. 1550\/1592\/1775 and1881 of 2014 dt. 22-08-2017 (2017) 86<\/em><\/strong><\/p>\n<p><strong><em>taxmann.com 24 (Bom.)(HC) <\/em><\/strong>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.<\/p>\n<p><em>\u201cYou may never know what results come from your action. But if you do nothing, there<\/em><\/p>\n<p><em>will\u00a0 be\u00a0 no result.\u201d<\/em><\/p>\n<p>&#8211; Mahatma Gandhi<\/p>\n","protected":false},"excerpt":{"rendered":"<p>S. 36(1)(iii) : Interest on borrowed capital- Interest free loans and advances given to subsidiary &#8211; Interest-free funds available with assessee are sufficient to meet investment\/ advances &#8211; Presumption is that investments in subsidiaries were out of interest free funds &#8211; No disallowance can be made under section 14A. [S. 14A]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-13308","post","type-post","status-publish","format-standard","hentry","category-income-tax-act"],"acf":[],"jetpack_featured_media_url":"","jetpack_shortlink":"https:\/\/wp.me\/p9S2Rw-3sE","jetpack-related-posts":[],"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13308","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/comments?post=13308"}],"version-history":[{"count":1,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13308\/revisions"}],"predecessor-version":[{"id":13309,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/posts\/13308\/revisions\/13309"}],"wp:attachment":[{"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/media?parent=13308"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/categories?post=13308"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/itatonline.org\/digest\/wp-json\/wp\/v2\/tags?post=13308"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}