2013 (8) TMI 320 - AT - Income Tax

Interest expenditure paid to bankers - user of interest bearing funds for non-business activities - Held that - First Appellate Authority has deleted the disallowance on the ground that assessee has more surplus interest free funds than the advances and investment. In other words on the record Assessing Officer failed to establish that interest bearing funds were used either for making advances to the sister concern or for investment in the mutual funds. If that be so, then how disallowance can be made. The stand of the Assessing Officer is that assessee should have used its own fund instead of interest bearing borrowings for running the business. In our opinion, Assessing Officer cannot force the assessee to earn interest income or save interest expenses for running the business. The Assessing Officer was unable to demonstrate that interest bearing loans were used by the assessee other than business purpose - Decided against Revenue. Disallowance u/s 14A - CIT deleted addition - Held that - section 14A, even prior to the introduction of sub-sections (2) & (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method - Following decision of C. I. T., Mumbai Versus M/s. Walfort Share & Stock Brokers P. Ltd. 2010 (7) TMI 15 - SUPREME COURT and Maxopp Investment Ltd. vs. CIT 2011 (11) TMI 267 - Delhi High Court - Decided against Revenue.

Summary

Issues:
1. Disallowance of interest expenses under Section 14A read with Rule 8D.
2. Deletion of addition of interest expenditure.
3. Deletion of addition made under Section 14A (Rule 8D) of the Income-tax Act, 1961.

Issue 1: Disallowance of interest expenses under Section 14A read with Rule 8D:
The assessee, engaged in the business of manufacturing and export of readymade garments, filed a return declaring a loss and various incomes, including interest expenses. The Assessing Officer disallowed interest payments under Section 14A read with Rule 8D. However, the CIT (A) deleted both additions, emphasizing the lack of specific findings on expenditure incurred for earning dividend income. The appellant's surplus interest-free funds were highlighted, and it was argued that interest-bearing borrowings were not diverted to sister concerns or investments. Citing relevant case laws, the disallowances were deleted. The Tribunal upheld the CIT (A)'s decision and dismissed the revenue's appeal on this issue.

Issue 2: Deletion of addition of interest expenditure:
The appeal concerned the deletion of an addition of interest expenditure made by the Assessing Officer. The Tribunal noted that a similar issue had been decided in favor of the assessee by a coordinate Bench in a previous assessment year. The Tribunal found no change in the facts of the case and relied on the previous decision, dismissing the revenue's appeal on this ground.

Issue 3: Deletion of addition made under Section 14A (Rule 8D) of the Income-tax Act, 1961:
The issue involved the deletion of an addition made under Section 14A read with Rule 8D. The Tribunal considered the decision of the Hon'ble Delhi High Court in a relevant case, emphasizing the assessing officer's obligation to determine the amount of expenditure incurred in relation to income not forming part of the total income. Referring to the principles outlined by the High Court, the Tribunal decided to restore this issue back to the Assessing Officer for further consideration in line with the High Court's decision. The Tribunal allowed the appeal partly for statistical purposes, dismissing the general nature of the third ground.

In conclusion, the Tribunal's judgment addressed the disallowance of interest expenses, deletion of interest expenditure addition, and the restoration of an addition made under Section 14A read with Rule 8D back to the Assessing Officer for reconsideration in light of a relevant High Court decision. The Tribunal upheld the decisions favoring the assessee on the first two issues and directed further assessment on the third issue.