2011 (12) TMI 580 - AT - Income Tax

Disallowance u/s 14A - shareholders fund of a company is utilized for the purchase of fixed assets - interest free funds generated or available with the company - the shareholders fund is much more than the amount advanced by the assessee without any interest to its sister concerns.

Summary

Issues:
1. Disallowance under section 14A of the Act.
2. Disallowance under section 36(1)(iii) of the Act.

Issue 1: Disallowance under section 14A of the Act:
The appeal concerns the disallowance of Rs. 20,08,103 under section 14A of the Act. The Tribunal referred to the judgment of the Hon'ble Bombay High Court in Godrej & Boyce Ltd. Mfg. Co. vs. DCIT, holding that the disallowance must be calculated on a reasonable basis and not rule 8D. Consequently, the Tribunal set aside the order and directed the Assessing Officer to determine the disallowance amount in accordance with the mentioned judgment.

Issue 2: Disallowance under section 36(1)(iii) of the Act:
The second issue pertains to the disallowance of Rs. 5,36,520 made under section 36(1)(iii) of the Act. The Assessing Officer disallowed a proportionate amount of interest due to loans advanced to sister concerns without interest. The Tribunal analyzed the case in light of the judgment in S.A. Builders Ltd. vs. CIT(A) & Anr., emphasizing that interest deduction is allowable if there is commercial expediency in advancing such loans. The Tribunal highlighted the importance of examining the purpose for which the funds were advanced and utilized by the sister concern for business purposes to determine the deductibility of interest.

The Tribunal clarified that the burden of proof lies with the assessee to establish the commercial expediency of advancing loans to sister concerns for business purposes. In the absence of evidence demonstrating the business usefulness of the funds advanced, the deduction of interest cannot be allowed. Additionally, the Tribunal addressed the argument regarding the availability of own funds for advancing loans, emphasizing the need to consider the balance between interest-free and interest-bearing funds to determine the source of investments. Relying on precedent, the Tribunal concluded that if interest-free funds are sufficient to cover investments, interest deduction is permissible.

In conclusion, the Tribunal partially allowed the appeal, ordering the deletion of the disallowance under section 36(1)(iii) due to the availability of interest-free funds exceeding the amount advanced to sister concerns. The judgment underscores the importance of establishing commercial expediency and the source of funds for investments to determine the deductibility of interest in such cases.