2013 (11) TMI 155 - AT - Income Tax

Disallowance of interest paid to bank Held that - Although the assessee has advanced Rs. 1.12 crores out of the total assets of Rs.1.91 crores to various people without charging interest The assessee has not paid any interest on total assets of Rs. 1.91 crores Out of total bank loan taken the assessee has utilized only Rs.13.66 lakhs for margin deposit with stock broker - The disallowance shall be restricted to interest on Rs.13.66 lakhs - Decided in favour of assessee. Disallowance of interest u/s 14A read with rule 8D Held that - In view of the exempt income shown by the assessee in return of income the disallowance u/s 14A read with Rule 8D is reasonable and justifiable Decided against assessee.

Summary

Issues:
1. Disallowance of interest paid to the bank.
2. Disallowance under section 14A read with rule 8D.

Analysis:
1. Disallowance of Interest Paid to the Bank:
The assessee appealed against the disallowance of interest amounting to Rs. 9,61,379 paid to the bank. The Assessing Officer disallowed the interest, noting that the borrowed funds were not adequately proven to be utilized for business purposes. The assessee argued that the bank loan was utilized for the business of export and not for investments in exempted securities. However, the Commissioner of Income-tax (Appeals) upheld the disallowance, stating that the bank loan was used for margin deposits with stockbrokers and not for business purposes. Upon review, the Tribunal found that a portion of the loan, specifically Rs. 13.66 lakhs, was indeed utilized for margin deposits with stockbrokers. Consequently, the Tribunal directed the Assessing Officer to reevaluate and disallow interest only on the amount of Rs. 13.66 lakhs, rather than the entire loan amount.

2. Disallowance under Section 14A read with Rule 8D:
The Assessing Officer made a disallowance of Rs. 29,347 under section 14A due to the assessee showing exempted income of Rs. 2,11,149 and claiming various expenses in the profit and loss account. The disallowance was based on the view that certain expenses were related to the exempt income, thus falling under section 14A read with rule 8D. The Commissioner of Income-tax (Appeals) affirmed this disallowance. Upon review, the Tribunal found no fault in the decision of the Assessing Officer and the Commissioner of Income-tax (Appeals) as the disallowance was in accordance with rule 8D. Consequently, the Tribunal upheld the order of the Commissioner of Income-tax (Appeals) on this issue.

In conclusion, the Tribunal allowed the appeal of the assessee in part, directing the Assessing Officer to recalculate the disallowance of interest on the specific amount utilized for margin deposits with stockbrokers. The disallowance under section 14A read with rule 8D was confirmed by the Tribunal, as it was found to be reasonable and in compliance with the relevant provisions.