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2013 (9) TMI 114 - AT - Income TaxDisallowance made out of the interest claimed under section. 36(1)(iii), being the differential amount of interest paid on the borrowings and that charged on the advances to associate concerns - decline in the rate of interest charged from sister concerns - Held that - in the absence of direct nexus between the funds borrowed and advances made, no disallowance can be made - Decided in favor of assessee. Addition u/s 40A(2) - difference in interest charged from the sister concern and interest paid to bank - Held that - Assessing Officer has not challenged the genuineness of business expenditure but made the above addition of differential interest on the ground of reasonableness or because the transaction is adversely interpreted by him. Similar Interest has been paid in the preceding assessment years but no addition was made. As per facts the interest has been paid wholly and exclusively for the purposes of the business, hence, the reasonableness can not be doubted and the same can not be disallowed partly. Nature of transaction of purchase and sale of units - application of section 94(7) - held that - section 94(7) applies to any person that buys or acquires any securities or unit within a period of 3 months prior to the record date; if such person sells or transfers such securities or units within a period of 3 months after such date. - s regards the amendment w.e.f. 1-4-2005 by which the period of sale or transfer of the unit has been extended from 3 months to 9 months, it is observed that the amendment is clearly prospective and in no way can be said to be clarificatory in nature so that it can apply to Assessment Year 2004-05. The language used in the amended section 94(7) is plain and unambiguous. - Decided in favor of assessee. Receipt of dividend subsequent to the purchase of units, - As regards the observation made by the Assessing Officer that the units have been transacted in a way that the appellant had indulged in this device of dividend stripping with a view to reducing the tax liability, it is observed that the Assessing Officer has simply accused the appellant without bringing any material on record to substantiate such accusation. It is pertinent to note that the concerned mutual fund is a SEBI approved and recognized one. It is not the Assessing Officer s case that SEBI is a party to such colorable device. - Decided in favor of assessee. Disallowance of interest and other expenditure by invoking section 14A of the Income Tax Act as the funds were utilized in investments for earning exempt income - Learned Commissioner of Income Tax (Appeals) deleted the disallowance on the ground that the disallowance was made by the Learned Assessing Officer without any correlation or nexus having been established between such expenditure and dividend income. According to the Learned Commissioner of Income Tax (Appeals) it was a notional disallowance which cannot be upheld Held that - Disallowance of interest and other expenditure was also made in earlier years on earning of exempt dividend income Matter remanded to the A.O. for disallowance of interest and other expenditure in the light of the decision of Hon ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. v. Deputy Commissioner of Income-tax 2010 (8) TMI 77 - BOMBAY HIGH COURT Decided in favor of Revenue.
Issues Involved:
1. Disallowance of differential interest under section 36(1)(iii). 2. Disallowance of interest on advances to Virtuous Finance Ltd. 3. Disallowance of differential interest on overdue bills of Sun Pharmaceuticals Industries Ltd. 4. Disallowance of short term loss on the basis of dividend stripping under section 94(7). 5. Disallowance of expenses under section 14A for earning exempt income. Detailed Analysis: 1. Disallowance of Differential Interest Under Section 36(1)(iii): The Revenue's appeal challenged the deletion of disallowance of Rs. 1,09,93,933/- made out of interest claimed under section 36(1)(iii). The Assessing Officer (AO) had disallowed the interest paid on borrowings used to finance group companies at a lower interest rate, citing a lack of commercial expediency. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, noting that the assessee had sufficient interest-free funds and that similar disallowances had been deleted in earlier years by CIT(A) and upheld by the Tribunal. The Tribunal, following its previous decision, upheld the deletion of the disallowance, noting that the assessee had substantial interest-free funds and the advances were made in the normal course of business. 2. Disallowance of Interest on Advances to Virtuous Finance Ltd.: The AO disallowed interest on advances to Virtuous Finance Ltd. (VFL), arguing that the funds were not used for business purposes. The CIT(A) deleted the disallowance, noting that similar disallowances in earlier years had been deleted by CIT(A) and upheld by the Tribunal. The Tribunal upheld the deletion, noting that VFL had used the funds for strategic acquisitions that benefited the assessee's business, and the assessee had sufficient interest-free funds. 3. Disallowance of Differential Interest on Overdue Bills of Sun Pharmaceuticals Industries Ltd.: The AO disallowed Rs. 1,19,20,920/- on the grounds that the assessee paid higher interest on overdue bills to Sun Pharmaceuticals Industries Ltd. (SPIL) compared to the interest paid on bank borrowings. The CIT(A) deleted the disallowance, noting that similar disallowances in earlier years had been deleted by CIT(A) and upheld by the Tribunal. The Tribunal upheld the deletion, noting that the interest was paid wholly and exclusively for business purposes and the AO had not established any tax avoidance motive. 4. Disallowance of Short Term Loss on the Basis of Dividend Stripping Under Section 94(7): The AO disallowed Rs. 1,92,58,879/- on the grounds of dividend stripping, applying section 94(7) retrospectively. The CIT(A) deleted the disallowance, noting that the units were sold after the statutory period and the amendment to section 94(7) was prospective. The Tribunal upheld the deletion, following the Supreme Court's decision in Walfort Share and Stock Brokers P. Ltd., which held that losses over and above the dividend received would not be ignored under section 94(7). 5. Disallowance of Expenses Under Section 14A for Earning Exempt Income: The AO disallowed Rs. 20,73,231/- under section 14A, attributing expenses to earning exempt dividend income. The CIT(A) deleted the disallowance, noting that the AO had not established a direct nexus between the expenses and the exempt income. The Tribunal, following the Bombay High Court's decision in Godrej and Boyce Mfg. Co. Ltd., remanded the issue back to the AO for fresh adjudication, directing the AO to determine the actual expenditure incurred in relation to the exempt income. Conclusion: The Tribunal upheld the CIT(A)'s deletions of disallowances related to differential interest under section 36(1)(iii) and interest on advances to Virtuous Finance Ltd., noting the assessee's sufficient interest-free funds and business expediency. It also upheld the deletion of disallowance on overdue bills' interest to SPIL, emphasizing the business purpose and lack of tax avoidance motive. The Tribunal confirmed the deletion of disallowance under section 94(7) for dividend stripping, following the Supreme Court's precedent. However, it remanded the issue of disallowance under section 14A for fresh adjudication by the AO, in line with the Bombay High Court's decision.
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