2013 (3) TMI 744 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest expenditure u/s 36(1)(iii).
2. Enhancement of disallowance u/s 14A read with Rule 8D.

Summary:

1. Disallowance of Interest Expenditure u/s 36(1)(iii):
The assessee challenged the disallowance of Rs. 1,45,91,805/- made by the AO u/s 36(1)(iii) for interest-free advances to subsidiary companies. The AO disallowed the interest expenditure on the grounds that the assessee had borrowed funds which could have been used for interest-free loans, there was no commercial expediency, and the assessee was charging interest from another sister concern but not from the subsidiaries. The CIT(A) confirmed this disallowance. The Tribunal, however, noted that the assessee had sufficient interest-free funds from the proceeds of share capital and dividends, and thus, the interest-free loans were given out of these funds. The Tribunal also referenced several judicial precedents supporting the view that if interest-free funds are available, no disallowance is warranted. Consequently, the Tribunal directed the deletion of the disallowance made u/s 36(1)(iii).

2. Enhancement of Disallowance u/s 14A read with Rule 8D:
The CIT(A) enhanced the disallowance u/s 14A by Rs. 1,72,81,626/-, which was not initially disallowed by the AO. The assessee argued that the investments were made out of interest-free funds, and there was no nexus between borrowed funds and the investments. The Tribunal observed that for the previous years, the assessee had sufficient interest-free funds and no disallowance was made in those years. The Tribunal also noted that the assessee had received substantial interest-free proceeds during the relevant year, which were sufficient to cover the investments and loans given. Therefore, the Tribunal held that there was no nexus between borrowed funds and the investments, and the provisions of Rule 8D(2)(ii) were not applicable. The Tribunal directed the deletion of the enhanced disallowance made by the CIT(A) u/s 14A read with Rule 8D.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal directing the deletion of the disallowances made u/s 36(1)(iii) and u/s 14A read with Rule 8D.