2015 (8) TMI 1277 - HC - Income Tax

Disallowance of proportionate interest under section 36(i)(iii) - existence of commercial expediency - ITAT deleted the disallowance - Held that - The Commissioner of Income-tax (Appeals) and the Tribunal found as a matter of fact that the company had interest-free advances from its directors/shareholders and the members of their families amounting to ₹ 315.11 lakhs as against the interest-free advances made by the company aggregating to ₹ 219.72 lakhs as on March 31, 2008, In view thereof, it was rightly inferred that the respondent/assessee had enough interest- free funds which would cover the advances also made interest-free. - Decided in favour of assessee. Disallowance on account of investments in shops and pent-houses - assessee could not give any proof that such immovable assets would be used for business purpose - ITAT deleted the disallowance - Held that - The respondent-assessee is in the business inter alia of making investments in shares and property. We are entirely in agreement that merely because the assessee has given out some of its properties on rent, it does not lead to the inference that investments in other properties are not for business purposes. We are unable to see why such a view has been taken. The assessee can always give out its properties on rent and acquire further properties towards investment.- Decided in favour of assessee. Disallowance u/s 14A - ITAT deleted the disallowance - Held that - Assessing Officer had not recorded any reasons in the assessment order to hold that any expenditure had been incurred on earning the exempt income and that the Assessing Officer had rejected the claim of the appellant without giving any reasons for the same. Section 14A requires the Assessing Officer to record satisfaction that the interest bearing funds have been used to earn tax-free income and that the satisfaction must be based upon credible and relevant evidence. It was further held that the onus to prove that interest bearing funds were used lies squarely on the Revenue. The issue, therefore, in this regard was based only on the facts. The least that must be said in favour of the respondents is that the findings of fact recorded by the Commissioner of Income-tax (Appeals) and by the Tribunal are not perverse and that the view taken by them is certainly a possible view.- Decided in favour of assessee.

Issues:
1. Disallowance of proportionate interest under section 36(i)(iii)
2. Disallowance of investments in shops and pent-houses
3. Disallowance under section 14A read with rule 8D for investments in mutual funds and equity funds
4. Interpretation of section 14A regarding exempt income computation

Analysis:

Issue 1: Disallowance of proportionate interest under section 36(i)(iii)
The Tribunal upheld the order of the CIT (Appeals) deleting the disallowance of proportionate interest, considering the availability of interest-free funds sufficient to cover the interest-free advances made by the appellant. The Court referred to a previous judgment where it was established that as long as interest-free advances are made by an assessee with adequate free reserves, the amounts advanced interest-free cannot be added to the assessee's income. Therefore, the questions related to this issue were answered against the appellant.

Issue 2: Disallowance of investments in shops and pent-houses
The Court agreed with the findings of the CIT (Appeals) and the Tribunal that the respondent-assessee, engaged in the business of investing in shares and property, could acquire properties for investment purposes even if some properties were rented out. The Court dismissed the appellant's contention against the disallowance of investments in shops and pent-houses, emphasizing that giving out properties on rent does not negate the business purpose of other investments.

Issue 3: Disallowance under section 14A read with rule 8D for investments in mutual funds and equity funds
The Court noted that the Assessing Officer did not provide reasons or evidence to support the disallowance made for investments in mutual funds and equity funds under section 14A read with rule 8D. The Court found that the Assessing Officer had mechanically applied rule 8D without considering the appellant's assertions that no separate borrowing was made for investments and no special expenditure was incurred for earning dividend income. The Court held that the findings of the CIT (Appeals) and the Tribunal were based on credible evidence and not perverse, leading to the dismissal of the appeal.

Issue 4: Interpretation of section 14A regarding exempt income computation
The Court refrained from deciding on the interpretation of section 14A(1) and kept the issue open. It noted that the Commissioner of Income-tax (Appeals) and the Tribunal had deleted the disallowance based on facts, emphasizing that the Assessing Officer had not provided reasons for rejecting the appellant's claims regarding exempt income computation. The Court highlighted that the burden to prove the use of interest-bearing funds for tax-free income lies on the Revenue, and as the findings were based on facts, no question of law arose in this regard.

In conclusion, the appeal was dismissed based on the findings and interpretations of the Tribunal and the Commissioner of Income-tax (Appeals) on the various issues raised by the appellant.

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