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2012 (7) TMI 931 - AT - Income TaxDisallowance of interest - Held that - In view of the fact that the interest free funds advanced by the assessee to its subsidiary company are much less than the interest free funds available with it in the shape of Share capital along with Reserve and surplus, in our considered opinion there can be no question of sustaining any addition in this regard. We, therefore, uphold the impugned order but from a different angle. This ground is not allowed. Disallowance made u/s 14A to 5% of exempt income - Held that - CIT (A) overlooked the factual scenario prevailing in the present case in applying the ratio of the Tribunal order in the case of M/s. VIP Industries 2010 (9) TMI 1097 - ITAT MUMBAI , which restricted disallowance to 5% of exempt income only towards administrative expenses and not interest. In such a situation, we are not inclined to uphold the impugned order on this issue. The conclusion drawn by the Ld. CIT (A) on this issue is set aside and matter is restored to his file for taking a fresh decision on computation of disallowance u/s 14A as per law after allowing a reasonable opportunity of being heard to the assessee.
Issues:
1. Deletion of disallowance of interest on loan to sister concern. 2. Restriction of disallowance u/s 14A to 5% of exempt income. Issue 1: Deletion of disallowance of interest on loan to sister concern: The appeal addressed the deletion of disallowance of interest amounting to Rs. 45,78,389 on a loan advanced by the assessee to its sister concern. The Assessing Officer computed the disallowance based on the interest paid by the assessee on overall interest-bearing funds, related to an interest-free loan to the sister concern. The CIT (A) deleted the addition citing the judgment in the case of M/s. S.A. Builders vs. CIT (2007) 288 ITR 1 (SC). The tribunal noted that interest on borrowed loans advanced to a sister concern without interest is deductible if there is commercial expediency. The tribunal emphasized the importance of examining the purpose of advancing the money and how it was utilized by the sister concern. It was highlighted that the subsidiary's utilization of borrowed funds for business purposes justifies the deduction. The tribunal observed a discrepancy in the interest-free loan amount compared to the interest-free funds available with the assessee, concluding that no addition should be sustained. The tribunal upheld the deletion of the addition based on this analysis. Issue 2: Restriction of disallowance u/s 14A to 5% of exempt income: The second ground of appeal challenged the limitation of disallowance under section 14A to 5% of exempt income. The assessee earned exempt income from dividends and profits from a partnership firm but did not show any disallowance under section 14A. The Assessing Officer calculated the disallowance using Rule-8D, while the CIT (A) upheld a 5% disallowance of exempt income based on a Tribunal order in the case of M/s. VIP Industries Ltd. The tribunal reviewed the Tribunal order and noted that the 5% disallowance was specifically related to administrative expenses and not other components of Rule-8D, such as finance costs. It was concluded that the CIT (A) overlooked the factual context of the case and restricted the disallowance incorrectly. Consequently, the tribunal set aside the CIT (A)'s decision and remanded the matter for a fresh determination of the disallowance under section 14A, allowing the assessee a reasonable opportunity to present their case. In conclusion, the appellate tribunal partially allowed the appeal for statistical purposes, addressing the issues of interest disallowance on a loan to a sister concern and the restriction of disallowance under section 14A to 5% of exempt income, providing detailed analyses for each issue and setting aside the CIT (A)'s decision on the second issue for reconsideration.
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