2013 (11) TMI 1331 - AT - Income Tax

Interest as expenditure u/s 36(1)(iii) of the Income tax act Money borrowed at higher rate and money lent at lower rate of interest Allowability of interest Held that - Reliance has been placed upon the order of ITAT D Bench Ahmedabad in assessee s own case titled as The Dy. CIT vs. Aditya Medisales Ltd 2013 (9) TMI 114 - ITAT AHMEDABAD , which is decided in favor of assessee, wherein it was held that the assessee had its own substantial interest-free funds out of which advances have been made. An another noting has been made that the Revenue had not made out a case that interest bearing borrowed funds have been diverted to the group concerns by charging lower rate of interest In the present case, for the years under consideration, in the absence of any contrary material placed on record from the side of the Revenue, there is no option but to follow the past precedent as held in assessee s favour vide series of orders. Therefore, the result is that the ground as raised by the Revenue stood covered in assessee s favour, hence dismissed Decided against the Revenue. Invocation of section 14A read with Rule 8D with retrospective effect from 1.4.1962 - For AY 2005-06, 2006-07, assessee had received the Dividend Income of Rs.1,30,66,287/- (AY 05-06) and Rs.1,50,76,485/- (AY 06-07) stated to be on equity shares of Sun Pharmaceuticals Ltd. Dividend was claimed exempt u/s.10(34) r.w.s. 115-O of IT Act - expenses like interest on the funds borrowed for investment relating to the earning of exempt income be disallowed u/s.14A of IT Act Held that - Relying upon the decision in the case of M/s.Daga Capital Management Pvt.Ltd 2008 (10) TMI 383 - ITAT MUMBAI , it was held that the provisions of section 14A(2)&(3) of the I.T.Act being clarificatory in nature will apply retrospectively even though they have been introduced by Finance Act, 2006 w.e.f. 1.4.2007. Section 14A has been inserted retrospectively by Finance Act, 2001, with effect from 1.4.1962 As provisions of section 14A(2) & 14A(3) are also retrospective in nature and in result Rule 8D will also apply accordingly. In the present case, the Comm.(A) has held that in the absence of fundflow- statement an amount @ 10% of the dividend received was to be disallowed towards interest incurred towards investment in exempt income. Resultant an amount for AY 05-06 was taxed. For AY 06-07, the AO had held that interest bearing funds was utilized in financing the cost of acquisition of shares. The provision of Rule 8D r.w.s. 14A were applied - In the instant case, in the appeal before ITAT, remanded the entire issue of disallowance of interest and other expenditure under section.14A back to the file of the Learned Assessing Officer for fresh adjudication 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.

Summary

Issues Involved:
1. Disallowance of interest claimed under Section 36(1)(iii) for advances to associate concerns.
2. Disallowance of differential interest on overdue bills of an associate concern.
3. Disallowance of expenses under Section 14A for earning dividend income exempt under Section 10.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Claimed Under Section 36(1)(iii):
The Revenue Department challenged the deletion of disallowance of interest amounting to Rs.35,85,857/- for AY 2005-06 and Rs.30,49,530/- for AY 2006-07. The AO noted that the assessee had charged lower interest rates (9% or 9.5%) from its sister concerns while paying a higher rate (10.5%) on borrowings, leading to excessive interest expenditure. The AO invoked Section 36(1)(iii) to tax the differential amount. The CIT(A) deleted the addition, following precedents favoring the assessee from previous years. The ITAT upheld the CIT(A)'s decision, citing past ITAT orders in the assessee's favor, where it was established that the assessee had substantial interest-free funds and no evidence was provided by the Revenue to show diversion of interest-bearing funds to group concerns at lower rates.

2. Disallowance of Differential Interest on Overdue Bills:
The AO disallowed Rs.4,79,22,795/- for AY 2005-06 and Rs.65,10,131/- for AY 2006-07, arguing that the assessee paid excessive interest (15%) to Sun Pharmaceutical Industries Ltd. (SPIL) on overdue bills while charging lower rates (9% to 9.5%) on advances and paying lower interest rates to banks (13% and 11%). The CIT(A) deleted the disallowance, following decisions from previous years. The ITAT noted that the issue had been consistently decided in favor of the assessee in past ITAT and High Court decisions, which held that the onus to prove excessive interest payments under Section 40A(2)(a) was on the Revenue, and no such case was made. Hence, the ITAT dismissed the Revenue's grounds.

3. Disallowance of Expenses Under Section 14A:
For AY 2005-06, the AO disallowed Rs.13,56,629/- and for AY 2006-07, Rs.21,33,019/-, arguing that expenses related to earning exempt dividend income should be disallowed under Section 14A. The AO applied a notional disallowance of 10% of the dividend income due to the absence of a detailed fund flow statement. The CIT(A) deleted the additions, following the precedent from AY 2004-05. The ITAT remanded the issue back to the AO for fresh adjudication in light of the Bombay High Court decision in Godrej and Boyce Mfg. Co. Ltd. v. Deputy Commissioner of Income-tax (2010) 328 ITR 81(Bom), which streamlined the application of Section 14A and Rule 8D. The ITAT directed the AO to re-examine the matter, ensuring compliance with the latest judicial guidelines.

Conclusion:
The ITAT upheld the CIT(A)'s deletion of disallowances related to interest claimed under Section 36(1)(iii) and differential interest on overdue bills, citing consistent favorable decisions for the assessee in past years. However, the ITAT remanded the disallowance of expenses under Section 14A back to the AO for fresh adjudication in line with recent judicial precedents, allowing the Revenue's appeal for statistical purposes.