2014 (8) TMI 1057 - AT - Income Tax

Disallowance u/s 14A - Held that - CIT(A) examined the investment if any made during the year and whether the same was out of borrowed funds and has to exempt income or taxable income earned by the assessee on those investments. It was found that total investment during the year was ₹ 18.09 crores. It was further found that investment of ₹ 18 crores was out of borrowed funds but was only for a short period of two days. Whatever income was yielded through these investments, was offered as taxable income by the assessee in its return of income. It was also found by the CIT(A) that balance investment of ₹ 9,500/- was made in a company incorporated in Abu Dhabi, dividend income was also taxable. Accordingly, though disallowance was warranted u/s.14A, the CIT(A) also examined investment made after 31-3-2006, which had yielded only taxable income and recorded a finding to the effect that no direct or indirect expenditure was incurred by the assessee during the year for earning exempt income. Accordingly, he deleted the disallowance of interest expenditure of ₹ 77,82,750/- made by the AO. In respect of disallowance of administrative expenses to the tune of ₹ 21,27,075/-, the CIT(A) after following the order of the Tribunal for A.Y.2005-06 held that administrative and managerial expenditure of ₹ 7,12,177/- being 2% of total exempt income was attributable to earning of exempt income. Accordingly, disallowance was restricted to ₹ 7,12,177/-. No reason to interfere in the order of CIT(A) for deleting the interest expenditure and restricting the disallowance of other expenses to the tune of ₹ 7,12,177/-.- Decided against revenue Disallowance of interest claimed u/s.36(1)(iii) - Held that - Advance of ₹ 3.30 crores was made by the assessee to M/s Al Rahba International Trading LLC, Abu Dhabi, which is an entity operating in breeding and processing of poultry based in Abu Dhabi. Under Abu Dhabi law, any entity operating in Abu Dhabi needs to necessarily have a majority shareholding by a resident domiciled in Abu Dhabi. This, however, does not prohibit the profit sharing ratio and funding ratio to be different. However, share of the assessee company in the capital of M/s Al Rahba International Trading LLC was restricted to 45% because of the shareholding restriction in Abu Dhabi. In respect of profit and loss, it was decided by the partners that share of assessee would be 70%. Accordingly, part of the funding was required to be attributed towards share capital in the ratio of shareholding while the balance funding was required to be structured as loan. Thus, the assessee had satisfactorily explained the business expediency of investment of ₹ 3.30 crores in the said company for the purpose of business only i.e. for getting more share of profit in that company. The detailed finding recorded by the CIT(A) at para 2.3 with regard to application of funds for the purpose of business has not been controverted by the department by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the findings of the CIT(A) for deleting the disallowance of interest made by the AO - Decided against revenue

Issues Involved:
1. Applicability of Rule 8D for the assessment year 2006-07.
2. Disallowance of Rs. 99,09,825 under Section 14A.
3. Disallowance of indirect interest expenditure of Rs. 77,82,750.
4. Disallowance of administrative and managerial expenditure.
5. Adjustment as per clause (f) of the Explanation to Section 115JB.
6. Deletion of disallowance of interest of Rs. 41,34,375 claimed under Section 36(1)(iii).

Detailed Analysis:

1. Applicability of Rule 8D for the Assessment Year 2006-07:
The Revenue contended that the provisions of Rule 8D, inserted by the Income Tax (Fifth Amendment) Rules, 2008, were rightly invoked by the Assessing Officer (AO) for the assessment year 2006-07. However, the CIT(A) held that Rule 8D was not applicable for the assessment year 2006-07, based on the decision of the Hon'ble Bombay High Court in the case of Godrej Boycee and Mfg. Co. The Tribunal upheld this view, confirming that Rule 8D is applicable prospectively from the assessment year 2008-09.

2. Disallowance of Rs. 99,09,825 under Section 14A:
The AO disallowed Rs. 99,09,825 under Section 14A, attributing it to the earning of exempt dividend income. The CIT(A) deleted the disallowance, stating that the AO should adopt a reasonable basis or method consistent with all relevant facts and circumstances, as Rule 8D was not applicable. The Tribunal supported the CIT(A)'s decision, noting that the investments made during the year did not yield exempt income and were not out of borrowed funds.

3. Disallowance of Indirect Interest Expenditure of Rs. 77,82,750:
The AO disallowed Rs. 77,82,750 as indirect interest expenditure under Section 14A. The CIT(A) deleted this disallowance, finding that no direct or indirect interest expenditure was incurred by the assessee for earning exempt income. The Tribunal concurred, citing the earlier Tribunal decision for the assessment year 2005-06, which found that the investments made did not attract disallowance of interest expenditure.

4. Disallowance of Administrative and Managerial Expenditure:
The AO disallowed Rs. 21,27,075 as administrative and managerial expenditure. The CIT(A) restricted this disallowance to Rs. 7,12,177, following the Tribunal's decision for the assessment year 2005-06, which considered 2% of the total exempt income as sufficient administrative and managerial expenses. The Tribunal upheld this restriction, noting no change in facts from the previous year.

5. Adjustment as per Clause (f) of the Explanation to Section 115JB:
The CIT(A) directed the AO to consider only Rs. 7,12,177 for making adjustments as per clause (f) of the Explanation to Section 115JB. The Tribunal found no reason to interfere with the CIT(A)'s order, as the findings regarding the investments and expenditures were not controverted by the Revenue.

6. Deletion of Disallowance of Interest of Rs. 41,34,375 Claimed under Section 36(1)(iii):
The AO disallowed Rs. 41,34,375, attributing it to interest-free loans given by the assessee to Al Rahba International Trading LLC, Abu Dhabi. The CIT(A) deleted the disallowance, explaining that the loan was given for commercial expediency to get a higher profit share. The Tribunal upheld the CIT(A)'s decision, noting that the business expediency was satisfactorily explained and the detailed findings were not disputed by the Revenue.

Conclusion:
The Tribunal dismissed both appeals of the Revenue, upholding the CIT(A)'s decisions on all counts. The findings regarding the applicability of Rule 8D, disallowances under Section 14A, and the commercial expediency of interest-free loans were affirmed, ensuring no interference with the CIT(A)'s orders.

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