2016 (3) TMI 1230 - AT - Income Tax

Disallowance of interest free advance to Nihal Singh Pahwa Charitable Hospital - Held that - No hesitation in holding that no disallowance of interest can be made in this case; particularly when the advances are made out of the own funds of the assessee and the amount advanced to the sister concern / hospital / trust was by way of commercial expediency. Accordingly, we delete the disallowance made us/ 36(1)(iii) of the Act. - Decided in favour of assessee. Addition u/s 14A - Held that - No disallowance u/s 14A /Rule 8D of the I.T. Rules can be made if investment is out of own funds and reserves. We may also add here that Rule 8 D of I.T. Rules, 1962 is not applicable to the year under consideration in this case. However, Rule 8-D is applicable from assessment year 2008-09 as it has been held by the Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd Vs. DCIT (2010 (8) TMI 77 - BOMBAY HIGH COURT ). Even on this score also, we hold that disallowance made by the Assessing officer and confirmed by the CIT(A) is bad in law. - Decided in favour of assessee. Penalty u/s 271(1)(c) - Held that - There remains no basis for levying the penalty u/s 271(1)(c) of the Act for furnishing the inaccurate particulars of income. It is well settled law that where the additions made in the assessment order, on the basis of which penalty u/s 271(1)(c) was levied, are deleted, there remains no basis at all for levying the penalty u/s 271(1)(c) of the Act and, therefore, in such a case, no such penalty can survive and the same is liable to be cancelled. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of Interest under Section 36(1)(iii) of the Income-tax Act, 1961.
2. Disallowance under Section 14A of the Income-tax Act, 1961.
3. Penalty under Section 271(1)(c) of the Income-tax Act, 1961.
4. Charging of Interest under Sections 234B and 234D of the Income-tax Act, 1961.

Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii) of the Income-tax Act, 1961:

The primary issue in multiple appeals was the disallowance of interest on account of interest-free advances given to a charitable hospital, which was a sister concern of the assessee. The Assessing Officer (AO) disallowed the interest, citing a lack of commercial expediency. The CIT(A) upheld the AO's decision, but the Tribunal reversed this, citing sufficient own funds and reserves to cover the advances and commercial expediency based on precedents like the Supreme Court's decision in S.A. Builders Ltd. and Hero Cycles (P) Ltd. The Tribunal emphasized that the funds were advanced for business purposes, benefiting the assessee indirectly by providing free or concessional medical treatment to its employees.

2. Disallowance under Section 14A of the Income-tax Act, 1961:

The AO disallowed amounts under Section 14A read with Rule 8D for expenditure incurred to earn exempt income (dividends). The CIT(A) and Tribunal found that the investments were made out of the assessee's own funds and reserves, which were sufficient to cover the investments. The Tribunal cited the Jurisdictional High Court's decision in Bright Enterprises (P) Ltd. v. CIT, which held that no disallowance under Section 14A/Rule 8D is warranted if investments are made from own funds.

3. Penalty under Section 271(1)(c) of the Income-tax Act, 1961:

The AO imposed penalties for furnishing inaccurate particulars of income based on disallowances under Sections 36(1)(iii) and 14A. The CIT(A) cancelled the penalties, and the Tribunal upheld this decision, stating that the deletion of the additions in the quantum appeals left no basis for the penalties. The Tribunal reiterated that penalties cannot survive if the underlying additions are deleted.

4. Charging of Interest under Sections 234B and 234D of the Income-tax Act, 1961:

The charging of interest under Sections 234B and 234D was claimed to be consequential. The Tribunal directed the AO to give relief to the assessee accordingly, following the outcome of the primary issues.

Conclusion:

The Tribunal consistently found in favor of the assessee across multiple assessment years, emphasizing the sufficiency of own funds and commercial expediency in advancing interest-free loans to the charitable hospital. The Tribunal also upheld the principle that no disallowance under Section 14A/Rule 8D is warranted if investments are made from own funds. Penalties under Section 271(1)(c) were cancelled due to the deletion of the underlying additions. Interest under Sections 234B and 234D was deemed consequential and subject to relief based on the primary issues' outcomes.