S.36(1)(iii) Disallowance if assessee has significant interest in subsidiary business

Whether when the assessee has significant interest in the business of the subsidiary and utilizes even borrowed money for furthering its business any disallowance can be made u/s 36(1)(iii).

There is a finding of fact by the CIT (A) and Tribunal that borrowed funds were not used by the assessee for the purposes of investment in the shares of its wholly owned subsidiary Reliance Infocomm Ltd. or for making advances to Reliance Industries Ltd. Where the assessee, has significant interest in the business of the subsidiary and utilizes even borrowed money for furthering its business connection, there is no reason or justification to make a disallowance in respect of the deduction which is otherwise available u/s 36(1)(iii). the latter finding is independent of whether borrowed funds were or were not utilized, for in view of the judgment of the Supreme Court held, the fact that borrowed funds were utilized for making investments or, as the case may be, for making advances would not disentitle the assessee to the deduction so long as business expediency exists.

IN THE HIGH COURT OF BOMBAY

Income Tax Appeal No. 3155 OF 2009

THE COMMISSIONER OF INCOME TAX-7

Vs

M/s RELIANCE COMMUNICATIONS INFRASTRUCTURE LTD

Dated: March 28, 2012

JUDGEMENT

Per: D Y Chandrachud:

This appeal by the Revenue under Section 260A of the Income Tax Act, 1961, arises from a decision of the Income Tax Appellate Tribunal, dated 12 January 2009. The Assessment Year to which the appeal relates is 200304. We have permitted Counsel appearing on behalf of the Revenue, on his request, to reframe the questions of law as originally framed and allow the Revenue to amend the questions of law as follows :

“(A) Whether in the facts and the circumstances of the case and in law, the Tribunal was justified in holding that interest free funds available with the Assessee are much more than the amount invested in Reliance Infocomm Limited (subsidiary of Assessee) and advances given to Reliance Industries Limited, even though the sources of funds without 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 used for investment in equity shares of Reliance Infocomm Limited (subsidiary company).”