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2014 (2) TMI 1234 - AT - Income TaxDisallowance of interest made u/s 14A - CIT(A) deleted the disallowance on the reasoning that the assessee did not incur any interest expenditure for earning tax free dividend - Held that - The interest income has been received from bank deposit, while interest payment is made to directors and not against any bank loan. Hence, in our view, the question of netting off interest will not arise. In view of the foregoing discussions, in our view, the AO was justified in making disallowance of part of interest expenditure in terms of Rule 8D(2)(ii) of the Income tax Rules read with section 14A of the Act. Accordingly, we set aside the order of Ld CIT(A) on this issue and restore the addition made by the assessing officer. Disallowance u/s 36(1)(iii) - CIT(A) deleted the addition - Held that - There is no dispute that the assessee was required to invest a sum of ₹ 3.70 crore as per the above said agreement. Further the terms of the agreement also show that the assessee was selected as a turnkey contractor for executing the project. According to the assessee, a special purpose vehicle, viz., M/s Hassan Biomass Power Company Private Ltd was formed and the assessee has contributed a sum of ₹ 3.25 crores towards its share capital. According to the Ld A.R, the other share holder was M/s Nucon Energy Group, Mauritius. We notice that these factual aspects have not been examined by the assessing officer. However, the factual position narrated by the Ld A.R would show that the assessee was having a commercial interest and also obligation in making investment of ₹ 3.25 crores, referred above. Besides the above, the assessee has also supplied the materials to M/s Hassan Biomass power company Pvt Ltd. We notice that the said investment has been made in the earlier years, i.e., it is reflected in the Balance sheet as at 31.3.2005. Under these set of facts, the Ld CIT(A) has expressed the view that the investment of ₹ 3.25 crores cannot be said to be for non-business purposes. In view of the foregoing discussions, we are also inclined to accept the view expressed by Ld CIT(A). Accordingly, we uphold his view on this issue. Sale of shares - Income from business OR Capital gains - Held that - The tax authorities have reached their own conclusions without properly appreciating the facts surrounding the issue, particularly the clarificatory letter issued by the tax auditor, the frequency of transactions etc. Hence, in our view, this issue requires fresh examination at the end of the assessing officer. Accordingly, we set aside this order of ld CIT (A) on this issue and restore the same to the file of the AO with the direction to examine the issue afresh by duly considering all the materials that may be produced by the assessee and also the facts surrounding the issue and take appropriate decision in accordance with the law.
Issues Involved:
1. Disallowance of part of administrative expenditure made u/s 14A of the Act. 2. Assessment of profit on sale of shares under the head "income from business" as against "income from capital gain" declared by the assessee. 3. Disallowance of interest expenditure made u/s 36(1)(iii) of the Act. 4. Disallowance of part of interest expenditure made u/s 14A of the Act. Detailed Analysis: 1. Disallowance of Administrative Expenditure u/s 14A: - The assessee earned dividend income of Rs. 20,14,033, which was exempt from taxation but did not make any disallowance as required under Section 14A. - The AO disallowed 0.5% of the average value of investments, amounting to Rs. 4,84,640, and a part of the interest expenditure. - The CIT(A) deleted the disallowance of interest but confirmed the disallowance of administrative expenditure. - The Tribunal held that the AO need not record satisfaction in writing about the correctness of the claim made by the assessee. The provisions of sub-section (3) of Section 14A automatically apply when the assessee claims no expenditure was incurred in earning exempt income. - The Tribunal upheld the disallowance of administrative expenses as per Rule 8D(2)(iii) and Section 14A(3) even if the assessee claims no expenditure was incurred. 2. Assessment of Profit on Sale of Shares: - The AO assessed the profit on sale of shares under "Income from business" due to frequent and regular transactions, despite the assessee declaring it under "Capital gains". - The CIT(A) confirmed the AO's view, noting the high frequency and volume of transactions and the tax auditor's report indicating trading in shares as a business activity. - The Tribunal found that the tax authorities did not consider the clarificatory letter from the tax auditor and the nature of transactions properly. - The Tribunal remanded the issue back to the AO for fresh examination, considering all materials and facts surrounding the issue. 3. Disallowance of Interest Expenditure u/s 36(1)(iii): - The AO disallowed Rs. 26,54,640 of interest expenditure, claiming the assessee diverted interest-bearing funds for non-productive purposes by investing Rs. 3.25 crores in M/s Hassan Biomass Company Pvt Ltd. - The CIT(A) deleted the disallowance, holding that the investment was made for business purposes. - The Tribunal upheld the CIT(A)'s view, noting the commercial interest and obligation in making the investment and the supply of materials to M/s Hassan Biomass Power Co. Pvt Ltd. 4. Disallowance of Part of Interest Expenditure u/s 14A: - The AO disallowed part of the interest expenditure based on Rule 8D(2)(ii) of the Income Tax Rules. - The Tribunal found that the assessee used loan funds for making investments and upheld the AO's disallowance. - The Tribunal rejected the assessee's contention of netting off interest income against interest expenditure, as the interest income was received from bank deposits while interest payment was made to directors. Conclusion: - The Tribunal upheld the disallowance of administrative expenses and part of the interest expenditure under Section 14A. - The Tribunal remanded the issue of the head of income for the profit on sale of shares back to the AO for fresh examination. - The Tribunal upheld the deletion of disallowance of interest expenditure under Section 36(1)(iii) by the CIT(A). - Both the assessee's and the revenue's appeals were partly allowed.
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