2014 (8) TMI 1077 - AT - Income Tax

Disallowance made under section 14A - Held that - We find that the assessee had received dividend of ₹ 4,17 during the year under consideration,that on its own it had calculated the disallowance of ₹ 11,663/- u/s.14A r.w.r.8D of the Rules,that the FAA had deleted the addition of ₹ 181.95 lakhs and had confirmed the balance addition of ₹ 31.74 lacs, that the AO had filed appeal against the deleted of the disallowance whereas the assessee has challenged the order of the FAA for confirming the disallowance of ₹ 31.74 lakhs.We find that the FAA has deleted the addition because he was of the opinion that Rule 8D (2) (ii) was not properly applied by the AO. He found that interest expenses were related to the business of the assessee and not to the investment that yielded exempt income.In our opinion,no interest disallowance can be made if the assessee utilises borrowed funds for purposes other than investment. In the matter under appeal the FAA has given a finding of fact that the assessee had borrowed loans from various banks for specific purpose like purchase of plant, machinery other assets working capital for business, purchase of raw material, packing material, stores & spares,etc,that the other interest and finance charges had also been incurred towards business of manufacturing of ready made garments, that the loans were for the specific purpose of the business,that the interest expenditure was directly related towards business income which was taxable.DR could not controvert the finding given by him. Therefore, confirming his order we decide the effective ground of appeal against the AO and hold that interest expenditure incurred by the assessee was not hit by the provisions of rule 8D (2)(ii)of the Rules. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.
2. Inclusion of investment in subsidiary for disallowance computation under Rule 8D(iii).
3. Levy of interest under Section 234B of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The primary issue in both appeals pertains to the disallowance made under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962. The assessee argued that no expenditure was incurred to earn exempt income, as its significant investments were in a group company, Colorplus Fashions Ltd. The Assessing Officer (AO) disallowed Rs. 31,74,000 by applying Rule 8D(iii), which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], who noted that the AO had recorded dissatisfaction with the assessee's claim.

The Tribunal found that the AO had called for an explanation from the assessee and considered the reply before invoking Section 14A. The Tribunal held that the AO's satisfaction was adequately recorded, and the requirement of the Act was met. However, the Tribunal also noted that the interest expenses were related to the business and not to the investment yielding exempt income. Citing the Bombay High Court's decision in Glenmark Pharmaceutical Ltd., the Tribunal confirmed that no interest disallowance could be made if borrowed funds were used for purposes other than investment.

2. Inclusion of Investment in Subsidiary for Disallowance Computation:
The assessee contested the inclusion of investment in Colorplus Fashions Ltd. for computing disallowance under Rule 8D(iii). The CIT(A) had included this investment, reasoning that dividend from the subsidiary would be exempt when declared. The Tribunal observed that the CIT(A) did not provide a reason for this inclusion and referred to the principles laid down in cases like Garware Wall Ropes and J.M. Financial Ltd., which excluded strategic investments from disallowance computation. The Tribunal held that the disallowance should be restricted to Rs. 11,663, as initially calculated by the assessee, based on a rational and scientific basis.

3. Levy of Interest under Section 234B:
The assessee also challenged the levy of interest under Section 234B of the Act. The Tribunal deemed this issue to be consequential in nature and did not require separate adjudication.

Conclusion:
The Tribunal dismissed the appeal filed by the AO and partly allowed the appeal of the assessee. The disallowance under Section 14A was restricted to Rs. 11,663, and the levy of interest under Section 234B was not separately adjudicated. The order was pronounced in the open court on 27th August 2014.