Gujarat High Court Upholds ₹23.77 Crore Income Tax Relief For Adani Infrastructure Services

The Gujarat High Court has ruled in favour of Adani Infrastructure Services Pvt. Ltd., upholding the deletion of a ₹23.77 crore income tax disallowance.

The court found that the company's interest income exceeded its interest expenditure and that the borrowed funds were advanced in a back-to-back transaction.

The dispute concerned a disallowance under Section 14A of the Income Tax Act read with Rule 8D(2)(ii). Section 14A deals with expenditure incurred in relation to income that does not form part of an assessee's taxable income.

Rule 8D prescribes how such expenditure is to be calculated, while Rule 8D(2)(ii) deals with interest expenditure that is not directly attributable to a particular income or receipt.

A Division Bench comprising Justice Bhargav D. Karia and Justice Nirzar S. Desai observed that the assessee had no interest expenditure in excess of its interest income after the set-off.

“In view of the above dictum of law, it is not in dispute that there was no interest expenditure incurred by the assessee in excess of the interest income earned after setting off the expenditure against the income as admittedly, the interest income is more than the interest expenses incurred by the assessee. Therefore, in view of the decision of this Court in case of Nirma Credit & Capital (P.) Ltd. (Supra), there is no question of invoking Section 14A of the Act.”, the court ruled.

The appeal arose from an order of the Ahmedabad bench of the Income Tax Appellate Tribunal for Assessment Year 2009-10. The revenue had challenged the tribunal's decision upholding deletion of the ₹23.77 crore disallowance made by the Assessing Officer under Section 14A(2) read with Rule 8D(2)(ii).

During assessment, the Assessing Officer noted that Adani Infrastructure Services had earned dividend income of ₹79.20 crore, profit from a partnership firm of ₹18.38 lakh and interest income of ₹26.08 crore. The dividend income and partnership profit were not included in taxable income under the applicable provisions of the Income Tax Act.

The assessee had also incurred interest expenditure of about ₹25.77 crore. The assessment order records that the interest receipts were set off against the interest expenditure.

The Assessing Officer nevertheless computed a ₹23.77 crore disallowance towards proportionate interest under Rule 8D(2)(ii).

Before the Commissioner of Income Tax (Appeals), the assessee argued that the interest expenditure had a direct nexus with the interest income earned from the onward advance. It also submitted that the borrowing was used in a back-to-back transaction, with the funds advanced to another concern against interest.

The CIT(A) deleted the interest disallowance. It recorded that the assessee had borrowed funds from IDFC Ltd. and advanced them to Adani Infrastructure Developers Pvt. Ltd.

The interest earned on the advance was stated to be identical to the interest paid on the borrowing. The CIT(A) therefore found a direct nexus between the borrowing and the interest income.

Since the interest expenditure was directly attributable to the interest income, the CIT(A) held that no disallowance could be made under Rule 8D(2)(ii).

The revenue challenged the decision before the tribunal. The tribunal upheld the CIT(A)'s order, finding that the entire borrowing had been passed on and that the transaction was back-to-back.

Before the high court, the revenue argued that the assessee had employed mixed funds and had not maintained separate accounts for the borrowed funds and the amounts advanced to the other concern. It contended that the interest expenditure could therefore not be set off against the interest income.

The high court rejected the contention, relying on the decision in Shreno Ltd. and the concurrent factual findings of the CIT(A) and the tribunal.

The court also relied on its decision in Nirma Credit & Capital (P.) Ltd. In that case, it had held that interest expenditure for the purpose of Rule 8D(2)(ii) has to be considered after taking into account interest income earned by the assessee.

Applying that principle, the court held that the assessee had no interest expenditure in excess of its interest income.

The court further noted the concurrent finding that the borrowed funds had been advanced in a back-to-back transaction.

It observed, “Moreover, in the facts of the case, there are concurrent findings of fact arrived at by the CIT(Appeals) and the Tribunal that the funds, which were borrowed by the assessee, were given as an advance to Adani Enterprises Limited and therefore, there was back to back transaction for the advancement of the funds, which were borrowed and in such circumstances, there is no interest expenditure incurred by the assessee for earning the exempt income.”

The court held that the tribunal had not committed any error in upholding the deletion of the ₹23.77 crore disallowance under Section 14A read with Rule 8D(2)(ii).

The appeal was accordingly dismissed.

For Appellant: Advocate Maithili D. Mehta

For Respondent: B.S. Soparkar