TMI Blog2020 (10) TMI 800X X X X Extracts X X X X X X X X Extracts X X X X ..... case of unpaid sale price for transfer of of the Sodium Perborate Division made by the Assessee Company to its Subsidiary Company M/s.Chemasia Industries Limited and the outstanding loan liability to the 7.88 crores was also taken over by the Assessee Company. Therefore, even though borrowed funds might have been diverted, but the fact remains that the Assessee did not charge any interest on such unpaid price from the Subsidiary Company and even took over another loan liability of the Subsidiary Company. Matter deserves to be remanded to the Assessing Authority for holding an enquiry into this aspect of the matter and then consider the question of disallowance under Section 36(1)(iii). - T.C.(A) Nos.718/2017, 918 & 919 of 2014 - - - Dated:- 12-10-2020 - Dr. Justice Vineet Kothari And Mr. Justice M.S.Ramesh For the Appellant : Mrs.R.Hemalatha, Senior Standing Counsel For the Respondent : Mr.R.Vijayaraghavan COMMON JUDGMENT DR.VINEET KOTHARI,J. The Revenue has preferred these Appeals raising the following substantial questions of law under Section 260A of the Act for the Assessment Year 2012-2013:- (i) Whether the disallowance of ₹ 4.43 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot incurred wholly and exclusively for the purpose of business U/s.36(1)(iii) of the Act and with other additions passed order U/s.143(3) of the Act dated 12.03.2015. 4. Aggrieved by the order of the Ld. AO, the assessee has filed an appeal before the Ld. CIT(A). The Ld. AR argued the grounds and reiterated the submissions of assessment proceedings. The Ld. CIT(A) considered the findings of the AO and the submissions of assessee and the judicial decisions and relied on the assessee's own case for the assessment year 2000-09, where such similar disallowance made by the Assessing Officer and the Ld. CIT(A) has deleted the addition. On appeal by the Revenue, the Tribunal had confirmed the CIT(A) in favour of the assessee in ITA No.911/Mds/2013 dated 08.02.2014 . The Ld. CIT(A) relied on the Co-ordinate bench decision and allowed the appeal observed at para 6 of the order. 6. I have carefully perused the facts in issue, submissions made by the appellant and material on record. I find that the Hon'ble ITAT vide order dated 18.2.2014 in ITA No.911/Mds/2013 at page No.9 Para No.10 have categorically held that the AO had erred by disallowing the interest incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to sister concerns, then interest expenditure cannot be disallowed on the premises that the assessee has diverted interest bearing fund to its sister concerns. (i) CIT Vs. Reliance Utilities And Power Ltd. ([2009] 313 ITR 340 (Bom.)) Held, dismissing the appeal, that if there were funds available both interest-free and overdraft and/or loans take, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case, this presumption was established considering the funding of fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible. (ii). CIT Vs. Bharti Televenture Ltd. ([2011] 331 ITR 502(Del)) Held, dismissing the appeal, that the order of the Commissioner (Appeals) and the Tribunal showed that the assessee was maintaining a bank account with mixed common funds in which all deposits and withdrawals were made. There was no specific instance noted by the AO of direct nexus between the borrowed funds and the advances made to the subsidiaries. The AO had made general observations without point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gard to disallowance under Section 36(1)(iii) of the Act. The said provision of the Act provides for Other Deductions under Section 36 of the Act other than those specified from Sections 30 to 35 including their various sub-sections in Chapter II-D of the Income Tax Act. The relevant part of the said provision insofar as clause (iii) is concerned is quoted for ready reference:- Other deductions . 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, all computing the income referred to in section 28-- (i) the amount of any premium paid in respect of insurance against risk of damage or destruction of stocks or stores used for the purposes of the business or profession; (ia) the amount of any premium paid by a federal milk co-operative society to effect or to keep in force an insurance on the life of the cattle owned by a member of a co-operative society, being a primary society engaged in supplying milk raised by its members to such federal milk co-operative society; (ib) the amount of any premium paid by any mode of payment other than cash by the assessee as an employer to effect or to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure in the hands of the assessee is worked out as under: Interest bearing secured Funds - ₹ 26,42,21,000..(A) Average Interest free loan advanced-₹ 19,24,48,500/-..(B) Interest expense debited in the P L -₹ 6,08,56,000/- ..(C) Proportionate interest disallowance u/s.36(1)(iii) = (B/A)xC = (19,24,48,500/26,42,21,000) x 6,08,56,000 = ₹ 4,43,25,189/- Since the above interest amounting to ₹ 4,43,25,189/- cannot be said to be an expenditure incurred wholly and exclusively for the purposes of assessee's business the said expenditure is disallowed u/s.36(1)(iii) of the Act. 6. The learned Senior Standing Counsel for the Revenue, therefore, submitted that since the Assessee Company did not have any interest-free Surplus Fund with it to advance loan to its Subsidiary Company, and therefore, diversion of such funds cannot be meant for that purpose and consequently, the disallowance under Section 36(1)(iii) of the Act out of the amount of interest paid by the Assessee Company to its Bank was justified. 7. Per contra, the learned counsel for the Assessee Mr.R.Vijayaraghavan submitted with reference to T.C.A.No.918 of 2014 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , even though borrowed funds might have been diverted, but the fact remains that the Assessee did not charge any interest on such unpaid price from the Subsidiary Company and even took over another loan liability of the Subsidiary Company. 10. The Assessing Authority has merely worked out the disallowance under Section 36(1)(iii) vide the afore-quoted portion from the Assessment order on the basis of Average Interest free loan and Interest bearing Secured Funds from the Assessee Company. The Assessing Authority has not gone into the aspect of the unpaid sale price by the Subsidiary Company. The said enquiry was necessary before making any disallowance under Section 36(1)(iii) the Act. 11. Therefore, in our opinion, the matter deserves to be remanded to the Assessing Authority for holding an enquiry into this aspect of the matter and then consider the question of disallowance under Section 36(1)(iii) of the Act. Accordingly, we set aside all the three orders of the three Authorities below for the Assessment Year 20012-2013 and direct the Assessing Authority to pass fresh orders in accordance with law after giving opportunity of hearing to the Assessee. In view of the considera ..... 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