2016 (2) TMI 1081 - AT - Income Tax

Addition u/s 14A - Held that - If there are interest free funds available a presumption would arise that investment would be out of the interest free funds generated or available with the company if the interest free funds were sufficient to meet the investment.Therefore, in such circumstances, no disallowance under section 14A of the Act on account of interest can be made. - Decided in favour of assessee. Disallowance being the difference of interest charged from Hero Motors Ltd. @ 6% and interest rate of 7.75% - Held that - Revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case. It was further held that no businessman can be compelled to maximise its profits. And that the Income Tax Authorities must put themselves in the shoes of the assessee and see how a prudent businessman would work. The authorities must look at the matter from their own view point but that of a prudent businessman. Even the Hon ble Supreme Court in assessee s own case 2015 (11) TMI 1314 - SUPREME COURT OF INDIA had held that applying the said ratio to the facts of the case that no such notional addition on account of lesser rate of interest charged can be made by the assessee. In view of this, the Assessing Officer is directed to delete the addition made by him. Capitalization of interest on the assets appearing under the head capital work-in-progress by adopting the interest @ 7.75% - Held that - No loan had been raised by the assessee company for the purchase of furnace or for the construction of building. The said finding of the CIT (Appeals) had not been controverted by the learned D.R. for the Revenue. Further the total investment made by the assessee during the year on capital work-in-progress was more as against the net profit of the assessee for the year. See DCIT Vs. Samrat Forgings Ltd. 2012 (5) TMI 760 - ITAT CHANDIGARH In view of the above said facts and circumstances, we find no merit in the disallowance made by the Assessing Officer. Addition under section 36(1)(iii) - Held that - It is an undisputed fact that the assessee was making constant sale and purchases from these two concerns and amounts of money coming and going were on account of regular business of the assessee. During the course of business if some amount remains at the debit of the other company, the Assessing Officer cannot just presume it to be in the nature of loans and advances. Here also, the observations of the Delhi High Court in the case of Dalmia Cement Ltd. (2001 (9) TMI 48 - DELHI High Court ) is pertinent, whereby it was held that it is not the prerogative of the Department to dictate the terms of the business and Revenue cannot impose its view on the businessman when to give any money and when to receive it back. The transactions are going on with the sister concerns on regular business. Steps are being made and even if some amount remains at the debit, the Assessing Officer cannot consider the same as loan and cannot make addition under section 36(1)(iii) of the Act on the same.

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of interest difference charged from Hero Motors Ltd.
3. Capitalization of interest on capital work-in-progress.
4. Claim of depreciation on capitalized expenses.
5. Disallowance of interest expenditure under Section 36(1)(iii) for amounts due from group companies.
6. Deletion of penalty under Section 271(1)(c).

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The primary issue was the disallowance of Rs. 6,77,38,889/- made by the Assessing Officer (AO) invoking Rule 8D of the Income Tax Rules read with Section 14A of the Income Tax Act. The assessee earned significant dividend income and long-term capital gains, which were claimed as exempt under Section 10(38). The AO noted substantial investments and interest expenditure and applied Rule 8D to disallow the amount. The CIT (Appeals) had previously decided a similar issue in favor of the assessee for the assessment year 2008-09, and the ITAT upheld this decision, noting that the assessee's own funds and reserves were sufficient to cover the investments, thus no disallowance under Section 14A was warranted. The ITAT also noted that the AO did not provide a valid reason for disallowing administrative expenses already accounted for by the assessee.

2. Disallowance of interest difference charged from Hero Motors Ltd.:
The AO disallowed Rs. 1,29,452/- being the difference between the interest charged from Hero Motors Ltd. at 6% and the average interest rate of 7.75% on loans raised by the assessee. The CIT (Appeals) upheld this disallowance, citing non-business purposes. However, the ITAT, referencing the Supreme Court's judgment in the assessee's own case, ruled that the company's substantial reserves and surplus indicated that the loan was given out of its own funds, not borrowed funds. Thus, no notional addition on account of lesser interest rate was justified.

3. Capitalization of interest on capital work-in-progress:
The AO capitalized an interest amount of Rs. 6,77,388/- on assets under capital work-in-progress, adopting an interest rate of 7.75%. The CIT (Appeals) agreed with the AO. However, the ITAT found that no specific borrowings were made for the capital work-in-progress and cited a similar decision in the case of Samrat Forgings Ltd., where it was held that without specific borrowings for capital assets, no capitalization of interest was warranted. The ITAT allowed the appeal, reversing the disallowance.

4. Claim of depreciation on capitalized expenses:
The assessee claimed depreciation of Rs. 63,03,339/- on expenses capitalized in earlier years. The CIT (Appeals) dismissed this ground as it did not arise from the AO's order. The ITAT remanded the matter back to the AO, directing him to allow the depreciation after verifying the relevant information and providing the assessee an opportunity to present evidence.

5. Disallowance of interest expenditure under Section 36(1)(iii) for amounts due from group companies:
The AO disallowed Rs. 2,04,39,849/- as interest expenditure on debit balances from M/s Hero Exports Ltd. and M/s Hero Motors Ltd., treating them as interest-free advances. The CIT (Appeals) reversed this, noting that the amounts were due to regular business transactions, not loans. The ITAT upheld the CIT (Appeals) decision, emphasizing that the transactions were part of regular business, and the AO could not presume them to be loans.

6. Deletion of penalty under Section 271(1)(c):
The Revenue's appeal against the deletion of penalty under Section 271(1)(c) amounting to Rs. 2,32,98,690/- was dismissed. Since the additions sustained by the CIT (Appeals) were deleted by the ITAT, the penalty under Section 271(1)(c) did not survive.

Conclusion:
The ITAT allowed the assessee's appeal in ITA No.314/Chd/2013 and dismissed the Revenue's appeals in ITA No.493/Chd/2013 and ITA No.821/2014, providing relief to the assessee on all contested issues.

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