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2012 (12) TMI 1036 - AT - Income TaxDisallowance of interest u/s 36(i)(iii) - Held that - As far as the advance to M/s Devbhumi Spinning Weaving Mills is concerned, no purpose for the same was given before the Assessing Officer or the ld. CIT(A). Though before us, it was stated that the same was for the purpose of purchase of property but no evidence was filed before us, therefore, in the absence of any evidence it has to be concluded that money has been diverted for non business purpose. Since the assessee has admittedly borrowed huge amounts on interest, the proportionate interest has to be disallowed in respect of the advances made to M/s Devbhumi Spinning Weaving Mills - remit the issue relating to the disallowance of interest on account of advance to M/s Balwindra Tools Pvt Ltd to the file of Assessing Officer to examine the iqrarnama filed before the first appellate authority and decide the issue in accordance with law. Disallowance of expenses of interest u/s 14A - Held that - Investment made in a firm is to be treated as investment for earning exempt income - after introduction of Section 14A, it was possible to apportion the expenditure between taxable income and exempted income. The perusal of the assessment order shows as observed earlier, no where before the Assessing Officer or the ld. CIT(A), the assessee has made a specific mention to show which particular funds were borrowed for which particular requirement and in the absence of such specific utilization Rule 8D, would be applicable. Perusal of the assessment order shows that disallowance u/s 14A has been worked out on the basis of Rule 8D which is as observed earlier applicable in case of the assessee. Therefore, we set aside the order of the ld. CIT(A) and restore that of the Assessing Officer.
Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income-tax Act, 1961. 2. Disallowance of expenses under Section 14A of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Disallowance of Interest under Section 36(1)(iii): Background: The assessee had borrowed funds and claimed interest on these borrowings. The Assessing Officer (AO) noticed that the assessee had made advances to four parties without providing sufficient explanation for the business purpose of these advances. Consequently, the AO disallowed 12% interest on these advances, totaling Rs. 4,52,959. Appeal to CIT(A): The assessee contended that the advances were for business purposes, specifically for negotiating land purchases. The CIT(A) accepted the explanations for three parties (Shri Suresh Kumar, M/s Panthur Farms Pvt Ltd, and M/s Balwindra Tools Pvt Ltd) and deleted the disallowances for these advances. However, the disallowance for M/s Devbhumi Spinning & Weaving Mills was confirmed due to lack of evidence. Tribunal's Decision: - M/s Devbhumi Spinning & Weaving Mills: The Tribunal upheld the disallowance, noting that no evidence was provided to substantiate the business purpose of the advance. The Tribunal relied on the decision of the Punjab & Haryana High Court in CIT V. Abhishek Industries, concluding that the money was diverted for non-business purposes. - M/s Balwindra Tools Pvt Ltd: The Tribunal observed that additional evidence (Iqrarnama) was admitted by the CIT(A) without giving the AO an opportunity to examine it. Therefore, the Tribunal set aside the CIT(A)'s order and remitted the issue back to the AO for examination of the Iqrarnama and to decide the issue in accordance with the law. 2. Disallowance of Expenses under Section 14A: Background: The AO noticed that the assessee had claimed interest expenses amounting to Rs. 2,13,46,266 and had made investments in partnership firms and mutual funds, the income from which was exempt. The AO invoked Rule 8D to compute the disallowance of expenses related to these investments, totaling Rs. 24,71,119. Appeal to CIT(A): The assessee argued that the investments were made for business purposes and out of paid-up capital and reserves, not borrowed funds. The CIT(A) partially agreed, confirming a disallowance of Rs. 4,51,629 and deleting the remaining Rs. 20,19,490. Tribunal's Decision: - Applicability of Section 14A: The Tribunal noted that Section 14A applies to expenses incurred in relation to exempt income. The Tribunal referred to the decision of the Bombay High Court in Godrej and Boycee Manufacturing V DCIT, which held that Rule 8D applies from the Assessment Year 2008-09 onwards. - Investment in Partnership Firms: The Tribunal rejected the assessee's argument that investment in a partnership firm, which pays taxes, should not be considered for disallowance under Section 14A. The Tribunal cited the Bombay Bench of the Tribunal's decision in Dharmasingh M. Popat V ACIT, which treated investments in firms as investments for earning exempt income. - Mixed Funds: The Tribunal observed that the assessee had mixed funds and did not maintain separate accounts for surplus funds. Therefore, Rule 8D was applicable to apportion the expenses between taxable and exempt income. - Conclusion: The Tribunal set aside the CIT(A)'s order and restored the AO's order, confirming the disallowance of Rs. 24,71,119 under Section 14A. Final Order: The appeal of the assessee was dismissed, and the revenue's appeal was partly allowed. The Tribunal's decision was pronounced on 28.12.2012.
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