CIT VS Reliance Industries Ltd 2019

Active learning

CASE Analyse

Tax law

Name :Brahmalingesh,P

Uid : SM 121013

National law university and judicial academy assam

Contents
INRTODUCTION.....................................................................................................................................3
Issue and Facts.......................................................................................................................................4
View.......................................................................................................................................................4
Conclusion.............................................................................................................................................6
Bibliography...........................................................................................................................................7
 INRTODUCTION

Interest on borrowed capital as well as interest-free loans and advances made to a subsidiary
were taken into consideration in the case of IT (LTU) v. Reliance Industries Ltd. (2019) 410
ITR 466/175 DTR 1/307 CTR 121/261 Taxman 164 (SC). It was noted that the assesses'
interest-free funds were adequate to cover the advances and investments undertaken.
Consequently, it was assumed that interest-free funds were used to fund the investments in
subsidiaries. Consequently, it was determined that section 14A of the Income Tax Act could
not be used to deny anything. This ruling offers significant new information on how interest
on loaned cash should be handled as well as how interest-free funds should be used for
subsidiary advances and investments.

The assesses gave its subsidiaries interest-free loans of Rs. 3,727.14 crores during the year in
question. Because these loans were not taken out for business purposes, the Assessing Officer
refused to approve a reasonable amount of interest on them. The Tribunal concluded,
however, that the assesses had a sufficient amount of interest-free money on hand, and that
the net profit for the year after taxes and before depreciation not only exceeded the
differential/incremental loan made to subsidiaries, but also exceeded the overall amount of
interest-free loans made to them. Therefore, the Tribunal assumed that the investments were
made using the assesses' accessible interest-free monies, and section 36(1) of the Act did not
require any disallowance. The Bombay High Court then agreed with the Tribunal's viewpoint,
stating They used past decisions to bolster their decision.
 Issue and Facts

The question at hand concerns whether interest on money given to subsidiaries under section
36(1)(iii) of the Act is deductible., In particular, the question is whether interest that would
not have been due to banks had money not been given to subsidiaries can be deducted.
Additionally, the question of whether interest paid on money provided to subsidiaries can be
considered incurred for business purposes and thus be permitted under section 36(1)(iii) of
the Ac is being investigated.

Furthermore, the question of whether Advancetown 36(1)(iii) of the Act permits the
deduction of interest expenditures spent for business purposes is brought up by the situation
in which an assessee has enough interest-free money available to them. This implies that the
business must use the interest-bearing money. If a taxpayer is paying interest on a loan that
was advanced to a group company, the interest may be denied unless it can be demonstrated
that the loan was given for business purposes and that the two firms' operations are related. It
might be assumed that Ed to the subsidiary comes from the interest-free money.

View

There may be repercussions if an assessor fails to comply with section 36(1)(iii) of the Act.
However, courts have determined that if the assesses has enough interest-free funds to make
an advance to a subsidiary, it can be assumed that the advance is made from the available
interest-free funds, avoiding disallowance under section 36(1)(iii) of the Act. The
aforementioned presumption is inevitable because an entity may occasionally have both
interest-bearing and interest-free assets in a same account that are then used for different
payments. In the East India Pharmaceutical Works Ltd. case, the Supreme Court did in fact
recognize this presumption.

Section 36(1)(iii) of the statute allows interest expenses incurred for commercial operations
to be deducted. This provision implies that business operations are being carried out with the
interest-bearing money. Unless there is a direct business relationship between the two
companies and it can be shown that the loan was made for business purposes, the interest on a
taxpayer's loan may be deemed ineligible under section 36(1)(iii) of the law if the taxpayer is
repaying interest on a loan with the borrowed amount going to a subsidiary company.
Nonetheless, courts have determined that if the taxpayer has sufficient interest-free funds to
cover the advance to the subsidiary, it can be assumed that the advance was made from these
funds, negating the need for disallowance under section 36(1)(iii) of the legislation. When the
taxpayer has enough interest-free money to finance the advance to the subsidiary, this
inference is valid. Furthermore, a presumption of this kind is unavoidable when a taxpayer's
funds—both interest-bearing and non-interest-bearing—are combined into a single account
and utilized for a variety of purposes. In the instance of East India Pharmaceutical Works Ltd.
v. CIT [(1997) 224 ITR 627 (SC)], the Supreme Court recognized this presumption
notwithstanding the fact that the taxpayer did However, since the lower courts where the
matter was first tried did not hear this particular argument, they did not receive any relief in
that case.
. Furthermore, in the case of Woolcombers of India Ltd. v. CIT [(1982) 134 ITR 219 (Cal)]
(HC), the Calcutta High Court came to a similar conclusion. This theory was subsequently
supported by the judgments in CIT v. Reliance Utilities & Power Ltd. (2009) 313 ITR 340
(Bom)(HC), which was followed by a number of other rulings. Even if this isn't the case, it
may be argued that the company uses the interest-bearing money to create interest-free cash
that can be used for any purpose unrelated to business.
Since the lower courts did not hear the issue of interest-free funds, the assesses in the matter
of IT (1997) 224 ITR 627 (SC) did not gain any relief. A similar position was adopted in an
earlier ruling ofWoolcombers of India Ltd. v. CIT (1982) 134 ITR 219 (Cal) (HC) was
decided by the Calcutta High Court.The presumption hypothesis was then supported by the
Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd. (2009) 313 ITR
340 (Bom) (HC), and it has since been maintained in a number of additional rulings. Another
argument is that while the interest-bearing funds are used for business objectives, the interest-
free money can be used for non-business purposes.
 Conclusion

The Apex Court rejected the Revenue's appeal, ruling that it is assumed that interest-free
funds were used to finance subsidiary investments when the assesses' existing funds were
adequate to cover the investment. Accordingly, section 36(1)(iii) cannot be used to deny
access for the assessment years 2003–04 through 2006–07 (CA No. 10 of 2019 dt. 2-1-
2019).In CIT (LTU) v. Reliance Industries Ltd. (ITA Nos. 1550/1592/1775 and 1881 of 2014
dt. 22-08-2017 (2017) 86 CIT (LTU) v. Reliance Industries Ltd (Bom.)(HC), the Bombay
High Court's ruling has been upheld. This ruling also applies to section 14A of the Act, as
well as the former Rule 8D(2)(ii), which prohibits the assesses' shared interest expenditures.
applying the same amount to exempt income. "You may never know what results come from
your action," is a quotation from Mahatma Gandhi. However, nothing will happen if you do
nothing. The rulings in Taparia Tools Ltd. v. JCIT (2015) 372 ITR 605/276 CTR 1/231
Taxman 5 (SC)/177 CTR 33 and Dy. CIT v. Raghuvir Synthetics Ltd. (2017) 394 ITR 1/151
DTR 153/295 CTR 143/247 Taxman 393 (SC) are also pertinent.
 Bibliography

 Dy. CIT v. Raghuvir Synthetics Ltd (2017) 394 ITR 1/151

 DTR 153/295 CTR 143/247
 Taxman 393 (SC) and Taparia Tools Ltd. v. JCIT (2015) 372 ITR 605/276
 CTR 1/231 Taxman 5 (SC)/ 177 CTR 33
 CIT (LTU) v. Reliance Industries Ltd/
 CIT v. Reliance Utilities & Power Ltd. (2009)
 East India Pharmaceutical Works Ltd. v. CIT [(1997) 224 ITR 627 (SC)],
 Wool combers of India Ltd. v. CIT [(1982) 134 ITR 219 (Cal)]
