2013 (8) TMI 366 - AT - Income Tax

Disallowance of interest paid on loan - CIT deleted disallowance - Held that - once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman - Following decision of CIT v. Dalmia Cement (B.) Ltd. 2001 (9) TMI 48 - DELHI High Court and Munjal Sales Corporation Vs. CIT 2008 (2) TMI 19 - Supreme Court - Decided in favour of assessee. Disallowance u/s. 14A - CIT upheld partial diallowance - Held that - The assessee has sufficient interest free funds and hence no inference could be drawn that these investments were made out of borrowed funds - Commissioner of Income Tax (A) has decided the issue by restricting the addition u/s. 14A to ₹ 20,000/- which is the total value of investment, the income from which is exempt from tax. No contrary decision to the above has been shown - Decided against Assessee.

Summary

Issues Involved:
1. Disallowance of Rs. 20,000 under Section 14A of the Income Tax Act for earning exempt income.
2. Deletion of disallowance of interest paid on loan amounting to Rs. 45,38,908.
3. Restriction of disallowance under Section 14A to Rs. 20,000 despite disallowance being made in accordance with Rule 8D of the Income Tax Rules, 1962.

Detailed Analysis:

1. Disallowance of Rs. 20,000 under Section 14A of the Income Tax Act for earning exempt income:
The Assessee's appeal raised the issue that the Commissioner of Income Tax (Appeals) [CIT(A)] was not justified in upholding the disallowance of Rs. 20,000 under Section 14A of the Income Tax Act. However, the Assessee's counsel submitted that the appeal would not be pressed, leading to the dismissal of this appeal as not pressed.

2. Deletion of disallowance of interest paid on loan amounting to Rs. 45,38,908:
The Revenue's appeal contested the CIT(A)'s decision to delete the disallowance of interest paid on loans amounting to Rs. 45,38,908. The Assessing Officer (AO) had made a proportionate disallowance of interest based on the advances given to group entities and capital nature advances. The CIT(A) found that the facts and arguments were similar to those in the Assessee's appeal for the previous assessment year (2007-08), where the issue was decided in favor of the Assessee. The Tribunal upheld the CIT(A)'s decision, noting that the loans granted by banks for specific purposes are presumed to be utilized for those purposes unless evidence suggests otherwise. The Tribunal also referenced the Supreme Court's judgment in S.A. Builders Ltd. vs. CIT, emphasizing that the test is whether the interest-free loan was given as a measure of commercial expediency. The Tribunal found no evidence to contradict the Assessee's claim and upheld the CIT(A)'s order, dismissing the Revenue's appeal.

3. Restriction of disallowance under Section 14A to Rs. 20,000 despite disallowance being made in accordance with Rule 8D of the Income Tax Rules, 1962:
The Revenue's appeal also challenged the CIT(A)'s decision to restrict the disallowance under Section 14A to Rs. 20,000. The AO had made an addition of Rs. 4,06,439 by invoking Section 14A and computing the disallowance under Rule 8D. The Assessee argued before the CIT(A) that the investments were in close-ended mutual funds with no dividend payout and that the resultant gains or losses were treated as capital gains/losses, which are not exempt from tax. The CIT(A) accepted the Assessee's submissions, noting that the Assessee had sufficient interest-free funds and no material showed that interest-bearing borrowings were used for the investments. The CIT(A) restricted the disallowance to Rs. 20,000, the total value of the investment yielding exempt income. The Tribunal found no infirmity in the CIT(A)'s order and upheld it, dismissing the Revenue's appeal.

Conclusion:
Both the Revenue's and Assessee's appeals were dismissed. The Tribunal upheld the CIT(A)'s decisions on the deletion of the disallowance of interest paid on loans and the restriction of disallowance under Section 14A to Rs. 20,000. The Tribunal's decisions were based on precedents, the lack of contrary evidence, and the principle of commercial expediency.