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TMI Blog2012 (5) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... considering secured loans are not sufficient for the application of funds as can be seen from the working based on the funds received during the year and its application and even though the Annual Accounts of Reliance Industries Limited discloses only an amount of Rs. 455.26 crores as having received from the Assessee towards guarantee whereas the Assesee's was showing advances of Rs. 476 crores to Reliance Industries Limited, clearly indicating that the Assessee does not have its own funds for making investment in the subsidiary or for advances to Reliance Industries Limited and therefore borrowed funds have been utilized and interest on a pro rata basis has been rightly disallowed by the Assessing Officer; (B) Whether in the facts and the circumstances of the case and in law, the Tribunal was justified in relying on S.A. Builders v. Commissioner of Income Tax (Appeals) [2007] 288 ITR 1 (SC)] and holding that if the business purpose is there while advancing money to the sister concern the disallowance of interest cannot be sustained without appreciating that the said case is clearly distinguishable from the present case where interest bearing funds have inter alia been use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfactorily explained that the investments made and the loans and advances were for the purpose of business. The Assessing Officer relied upon a judgment of a Division Bench of this Court in Phaltan Sugar Works Ltd. v. CWT [1994] 208 ITR 989/72 Taxman 325. Accordingly, an interest disallowance of Rs.15.76 crores was made pro rata, as not being eligible for deduction under Section 36(1)(iii). 5. In appeal, the CIT(A) came to the conclusion that no disallowance under Section 36(1)(iii) could be made. According to the CIT(A), the assessee had sufficient interest free funds and the investments which were made in Reliance Infocomm Ltd. and the advances to the Reliance Industries Ltd. were out of interest free funds. The Assessing Officer relied upon a chart showing the incremental increase or, as the case may be, decrease in the sources of funds and the application of funds in arriving at this conclusion. Moreover, the CIT(A) held that the investments in Reliance Infocomm Ltd. were for the purpose of business as it ensured the utilization of the infrastructure of the assessee and in furtherance of the business prospects of the assessee in the area of telecommunication services. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vanced borrowed funds to a sister concern without charging any interest. In the present case, the assessee had not made any advance in respect of the transaction with its wholly owned subsidiary Reliance Infocomm Ltd. but had invested its funds in the subsidiary against the allotment of shares. An advance must be distinguished from an investment; (iii) The reasoning of the Assessing Officer in paragraph 4 of the assessment order would indicate that the assessee had used interest bearing funds either for making advances to RIL or for investing in the shares of Reliance Infocomm Ltd. A pro rata disallowance of the interest claimed was hence warranted. 8. On the other hand, Counsel appearing on behalf of the Assessee submitted that (i) There is a concurrent finding of fact both by the CIT(A) and the Tribunal that borrowed funds were not used by the assessee for the purpose of the investment, or as the case may be, for the grant of advances; (ii) Even if borrowed funds were utilized for investments, no case for disallowance would exist so long as the business of the assessee is furthered. In the present case, there is a factual finding by both the CIT(A) as well as by the Tribunal tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urs for the purpose of business. An expenditure, which is commercially expedient, may not be incurred under a legal obligation, but so long as it meets the requirement of commercial expediency, it has to be allowed. However, the Supreme Court held that it is not in every case that interest on borrowed loans would have to be allowed if the assessee advanced the money to a sister concern. Where the amount is advanced to a sister concern, for the personal benefit of its directors, for instance, it would not qualify to be regarded as commercial expediency. However, noted the Supreme Court, where a holding company "has a deep interest in its subsidiary advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would ordinarily be entitled to deduction of interest on its borrowed loans." The Supreme Court accordingly set aside all the orders passed by the authorities below including the judgment of the Tribunal and of the High Court and remanded the matter for a fresh decision. 11. In the present case, there is a finding of fact by the CIT(A) and by the Tribunal that as a matter of fact, borrowed funds were not used by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 36(1)(iii). Counsel appearing on behalf of the Revenue submits that there is a distinction between an advance, which is a payment handed over to some one as a loan and an investment which is money placed into financial schemes, shares or property with the expectation of making a profit. (Compact Oxford Reference Dictionary pp. 11 & 436) We are unable to accept that such a distinction will have any legal consequence in so far as the entitlement of the assessee to claim a deduction under Section 36(1)(iii) is concerned. In the present case, when the assessee advanced an amount to RIL that was with a view to furthering the business of the assessee. RIL in turn was to execute counter guarantees in favour of financial institutions for the benefit of the discharge of the EPCG obligations by the assessee. That was a security for the guarantees which those institutions were required to execute under the EPCG Scheme. The funds which were invested in the wholly owned subsidiary were again for the purposes of the business of the assessee. There is evidently a significant interest of the assessee in the business of its subsidiary since both the assessee and the subsidiary are engaged i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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