2014 (2) TMI 227 - AT - Income Tax

Disallowance of interest expenditure on unsecured loans Held that - The condition for s. 57(iii), as income would arise only where the borrowing is at a lower rate, and which fact is known in advance - not only is the interest on the loan/s given lower, but also the entire borrowed capital has not been utilized for interest bearing loans - The claim of interest to the extent of the income earned and confirming the disallowance for the balance t be allowed - the same would take care of both the differential in the interest rates as also the shortfall in the utilization of borrowed capital for interest bearing loans. The wide variation between the interest received as well as paid would itself show that the funds invested are much higher than that borrowed, for which the interest is paid, so that the difference would only be on account of investment of own capital - no hard and fast rule in this respect could be prescribed, and it is well open for the assessee to claim that all the borrowed funds have been invested for business purposes Relying upon CIT vs. Reliance Utilities & Powers Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY - the assessee would be liable for deduction of the entire amount of interest paid against the total interest income. Disallowance u/s 14A of the Act r.w Rule 8D of the Rules Held that - The decision in High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. vs. Dy. CIT 2010 (8) TMI 77 - BOMBAY HIGH COURT followed - There is no reason to interfere in the findings of CIT(A) - the onus to support its case with facts and figures would be on the assessee - The assessing authority, on his part, is bound by law by the directions of a higher appellate authority and, thus, no case for apprehension exists - the A.O. s working for the year would be guided by the said rule - Decided partly in favour of Assessee.

Summary

Issues:
- Disallowance of interest expenditure on unsecured loans
- Disallowance of bank charges and professional charges
- Disallowance u/s.14A for AY 2005-06
- Addition on account of deemed dividend u/s. 2(22)(e)

Issue 1: Disallowance of interest expenditure on unsecured loans:
The appeals by the Assessee contested its assessment under section 143(3) r.w.s 153A of the Income Tax Act, 1961 for three assessment years. The primary issue raised was the disallowance of interest expenditure incurred on unsecured loans claimed as deduction against interest income assessable under the head 'income from other sources'. The Revenue dismissed the claim citing the absence of a nexus between the borrowed capital and its utilization for earning interest. The Tribunal analyzed each assessment year separately. For AY 2005-06, the Tribunal allowed the claim of interest to the extent of income earned, confirming the disallowance for the balance. For AY 2007-08, the Tribunal held that part of the borrowed capital was utilized for investment in partnership firms, qualifying for deduction u/s. 36(1)(iii). The Tribunal allowed deduction of the entire interest paid against the total interest income. Similarly, for AY 2009-10, the Tribunal allowed deduction for the entire interest paid based on similar reasoning.

Issue 2: Disallowance of bank charges and professional charges:
The second ground of appeal concerned the disallowance of bank charges and professional charges in computing the assessee's income u/s. 56. The Tribunal noted that the ld. AR conceded to having no case and declined to press the said ground for all the years, leading to the dismissal of this ground.

Issue 3: Disallowance u/s.14A for AY 2005-06:
The third ground for AY 2005-06 was in respect of disallowance u/s. 14A. The ld. CIT(A) restored the matter back to the file of the A.O. for working out the disallowance on a reasonable basis in compliance with the direction by the jurisdictional High Court. The Tribunal declined to interfere with the directions, emphasizing the onus on the assessee to support its case with facts and figures. The Tribunal dismissed the assessee's ground no. 3 for AY 2005-06 and AY 2007-08 based on similar reasoning. For AY 2009-10, the Tribunal clarified that Rule 8D would apply with full force, directing the A.O. to rework the disallowance in compliance with the directions by the High Court.

Issue 4: Addition on account of deemed dividend u/s. 2(22)(e):
Ground no. 4 for all the years related to an addition on account of deemed dividend u/s. 2(22)(e). The Tribunal noted that this matter was omitted to be adjudicated by the ld. CIT(A), and therefore, the Tribunal could not consider the same on merits. The issue was directed to travel back to the ld. CIT(A) for adjudication on merits.

In conclusion, the Appellate Tribunal partly allowed the assessee's appeals for all the years, addressing the issues of interest expenditure on unsecured loans, disallowance of bank charges and professional charges, disallowance u/s. 14A, and addition on account of deemed dividend u/s. 2(22)(e) in a detailed and comprehensive manner.