TMI Blog2017 (10) TMI 677X X X X Extracts X X X X X X X X Extracts X X X X ..... to its subsidiaries. We further observe that if there are funds available, both interest free funds and interest bearing funds, then the presumption would arise that its advances would be out of interest free advances generated or available with the assessee, if the interest free funds were sufficient to meet the advances given to the subsidiaries. In this case, on perusal of facts available on record, we find that the assessee has demonstrated with evidence that it has sufficient interest free funds to cover the advances given to its subsidiaries. Therefore, considering the facts and also relying upon the judgment of the Hon’ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT) we are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 83,28,142 inter alia making additions towards disallowances u/s. 14A r.w. Rule 8D, disallowance of interest expenditure u/s. 37 and disallowance of provision for warranty. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(Appeals). 4. Before the CIT(Appeals), the assessee had challenged the additions made by the AO towards disallowance u/s. 14A r.w. Rule 8D and disallowance of interest u/s. 37 of the Act. The CIT(Appeals) for the detailed reasons recorded in the appellate order dated 06.10.2016 partly allowed the appeal filed by the assessee wherein he deleted the additions made by the AO towards disallowance of expenditure u/s. 14A r.w. Rule 8D and confirmed the additions made by the AO towards ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces Pvt . Ltd . 6. On the other hand, the ld. DR submitted that the assessee has not substantiated its claim that advances to subsidiaries are out of its own fund and no interest bearing fund has been diverted. The ld. DR further submitted it is clear from the fact that assessee is having long term borrowings of ₹ 2,01,85,779 and short term borrowings of ₹ 3,85,00,917. Though the assessee claims to have own funds to establish sources for advances given to subsidiaries, the assessee could have used own funds as its working capital or else closed the long term borrowings so that interest expenditure would have been reduced. As regards commercial expediency, though assessee claims the advances are in the nature of normal b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsidiary companies are normal commercial transactions between a holding company and subsidiary company and the loans are extended in the normal course of business, therefore, the same cannot be considered as diversion of interest bearing funds to subsidiaries. The assessee further contended that it has its own interest free funds in the form of share capital to explain loans given to subsidiaries which is evident from the fact that during the financial year its share capital has been increased which is sufficient to explain the advances given to the subsidiaries. The assessee further contended that although it has borrowed long term and short term borrowings from banks and financial institutions during the financial year, its borrowings hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e out of the interest free funds generated or available with the company. The relevant observations of the Hon ble High Court are reproduced below:- 16 . If there be interest - free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest - free funds available . In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd . v . CIT [ 1997 ] 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd . [ 1982 ] 134 ITR 219 where a similar issue had arisen . Before the Supreme Court it was argued that it shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both by the Commissioner of Income - tax ( Appeals ) and the Income - tax Appellate Tribunal . 10. In this case, on perusal of facts available on record, we find that the assessee has demonstrated with evidence that it has sufficient interest free funds to cover the advances given to its subsidiaries. Therefore, considering the facts and also relying upon the judgment of the Hon ble Bombay High Court in the case of Reliance Utilities Power Ltd . ( supra ) , we are of the view that the AO has erred in disallowing interest expenditure u/s. 36(1)(iii) / 37(1) of the Act towards advances given to assessee s subsidiaries companies. Therefore, we direct the AO to delete the additions made towards disallowance of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X
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