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TMI Blog2021 (9) TMI 282X X X X Extracts X X X X X X X X Extracts X X X X ..... whom the assessee company has taken loan at 11.5% could have directly advanced the money to RHSEZ from whom interest at the rate of 10.79% has been charged by assessee? 2. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified in holding that the assessee has received both interest free funds as well as interest bearing funds from RIL then, an average method of changing of interest has to be put into place and thus, the average rate of borrowing comes to 2.99% whereas the interest charged by the assessee is 10.79% without appreciating that the assessee in its own submission submitted date wise chart of interest bearing loan taken from RIL and its advancement to four concerns which clearly shows that amount received from RIL has been given as loan on the same day to another concern at a lower rate of interest? 3. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was justified restricting the disallowance to Rs. 2,13,159/- and in holding that the assessee's suo-moto disallowance u/s 14A is reasonably fair without appreciating the decision of the Hon'ble ITAT, Ahmedabad Bench in the case of DC1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led below: - No. Name of the Concern Rate of interest Charged by the assessee 1. Reliance Haryana SEZ Ltd. (RHSL) 10.79% 2. Infotel Telecom Inf. Pvt. Ltd. 9% 3. Shinano Retail Pvt. Ltd 9% 4. Reliance Polyfins Ltd. 14% Accordingly, Ld. AO proceeded to compute interest disallowance u/s 36(1)(iii) and the assessee was asked to justify charging lesser rate of interest and also show commercial expediency for granting the loans at lesser rates. 5.2 The assessee, inter-alia, submitted that as per the provisions of Sec. 36(1)(iii), interest on borrowings would be an allowable business expenditure provided the borrowed funds were used for the purpose of business. Since the granting of loans and advances is the business of the assessee and borrowed funds have been used for the purposes of business, no disallowance could be made u/s 36(1)(iii) since all the conditions prescribed therein were duly fulfilled by the assessee. It was further submitted that majority of funds were advanced to its sister concern namely M/s Reliance Haryana SEZ Ltd. (RHSL) which was subsidiary of fellow subsidiary i.e. M/s Reliance Venture Limited (RVL) which, in turn, was subsidiary of M/s RIL. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 259.26 Lacs and offered suo-moto disallowance u/s 14A or Rs. 2.13 Lacs. The same was computed on the basis of 1/4th of expenditure under various heads. However, Ld. AO invoking Rule 8D, computed indirect expense disallowance u/r 8D(2)(iii) for Rs. 1052.60 Lacs, being 0.5% of average value of investments. Since the assessee had claimed expenses of Rs. 11 Lacs only, the disallowance was restricted to the extent of Rs. 11 Lacs. Appellate Proceedings 7.1 During appellate proceedings, the assessee reiterated that borrowed funds were utilized for business purposes and therefore, interest would be fully allowable u/s 36(1)(iii). Reliance was placed on the decision of Hon'ble Supreme Court in the case of Hero Cycles (P.) Ltd. (379 ITR 347) which held that once it was established that there was nexus between the expenditure and the purpose of the business, the revenue cannot justifiably claim to put himself in the armchair of the businessman or in the position of Board of Directors and assume the role to decide as to how much is reasonable expenditure having regard to the circumstances of the case. No businessman could be compelled to maximize his profits and revenue must put themse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was to be deleted. 7.4 Having held so, Ld. CIT(A) also observed that the assessee had obtained interest free funds as well as interest bearing funds from M/s RIL. Considering the combined funds, the average rate of interest paid by the assessee was merely 2.99% which was much less than the interest charged from M/s RHSL. The working of the average rate has been tabulated on page nos.38 to 41 of the impugned order. Therefore, disallowance would not be justified from this angle also. 7.5 Regarding disallowance u/s 14A, it was observed by Ld. CIT(A) that out of total expenditure of Rs. 14.34 Lacs as claimed by the assessee, the assessee had suo-moto disallowed Rs. 2.13 Lacs u/s 14A and another disallowance of Rs. 5.77 Lacs was also made as 'Balances written off'. As against this, Ld. AO disallowed entire expenses debited to profit & loss account which could not be held to be justified. The disallowance offered by assessee u/s 14A was reasonable and fair and therefore, the disallowance as made by Ld. AO was to be deleted. Aggrieved as aforesaid the revenue is in further appeal before us. Our findings and Adjudication 8. From the facts on record, it could be observed that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch expenditure as a prudent businessman would incur for the purpose of business. The expenditure may not have been incurred under any legal obligation but yet is allowable as business expenditure if it was incurred on grounds of commercial expediency. Therefore, we concur with the conclusions drawn by Ld. CIT(A), in this regard. 9. Having held so, we find that the only requirement to claim interest expenditure u/s 36(1)(iii) is that the borrowed funds should have been expanded wholly and exclusively for business purposes. We find that it is undisputed fact that there is one-to-one correlation between the borrowed funds and the advances granted by the assessee. The funds have been lent for business purposes since the main objective was to develop the SEZ. Therefore, in our considered opinion, the primary requirement to claim deduction u/s 36(1)(iii) was duly fulfilled by the assessee. The Ld. CIT(A) has computed average borrowing rate @2.99% which would further support the case of the assessee only. Therefore, on the given facts and circumstances, we do not find any infirmity in the impugned order, in this regard. Ground Nos. 1 & 2 stand dismissed. 10. So far as the disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X
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