2014 (4) TMI 666 - AT - Income Tax

Disallowance of interest expenses Addition of estimated interest - Outstanding bank balance Held that - The excess balance shall automatically be transferred to a Fixed Deposit account, which will earn interest for the assessee - the assessee has effectively utilised the surplus funds - Since the Flexi Current account is a running account, the daily balances would change every day depending upon the deposits and collections - in order to put the bank balances for better use, the assessee seems to have opted for Flexi Current account and in that process, it has earned a sum of about Rs.5.00 lakhs as interest also - the AO s view that the assessee has kept the funds idle is not based on any material but only on surmises and conjectures - the AO has computed notional interest on the outstanding bank balance as at the year end, which is not permissible under the Act thus, the order of the CIT(A) set aside and the AO is directed to delete the addition Decided in favour of Assessee. Disallowance made u/s 14A of the Act Held that - The AO has applied Rule 8D, which is not applicable to the year - the assessee has earned exempted income - some amount of disallowance is called for in terms of sec. 14A - Assesseee as well as revenue agreed that a sum of Rs.15,000/- may be disallowed thus, the order fo the CIT(A) and the AO is directed to restrict the addition Decided partly in favour of Assessee.

Summary

Issues:
1. Disallowance of interest expenses amounting to Rs. 2,14,523/-
2. Disallowance made under section 14A of the Act of Rs. 16,378/-

Analysis:

Issue 1: Disallowance of Interest Expenses
The appellant, a partnership firm dealing in electrical goods, appealed against the disallowance of interest expenses by the Assessing Officer (AO) amounting to Rs. 2,14,523/-. The AO observed a net increment in bank balances and disallowed interest expenditure on the borrowed funds. The appellant contended that the excess balance in the current account was automatically transferred to a Fixed Deposit (FD) account, earning interest. The appellant argued that it effectively utilized the funds for business purposes and earned interest. The Tribunal held that the AO's presumption that the funds were idle was baseless. It noted the appellant's utilization of funds and the automatic transfer to FD accounts. The Tribunal found no justification for the AO's notional interest computation and directed deletion of the entire addition of Rs. 7,12,537/-.

Issue 2: Disallowance under Section 14A
The second issue pertained to the disallowance of Rs. 16,378/- under section 14A of the Act. The AO applied Rule 8D, which was deemed inapplicable for the relevant year. The appellant had earned exempted income, necessitating some disallowance under section 14A. The Tribunal agreed on a disallowance of Rs. 15,000/-, modifying the CIT(A)'s order. Consequently, the Tribunal partly allowed the appeal, directing the AO to restrict the addition to Rs. 15,000/- on this ground.

In conclusion, the Tribunal ruled in favor of the appellant, setting aside the disallowance of interest expenses and reducing the disallowance under section 14A. The judgment emphasized the proper utilization of funds by the appellant and the incorrect application of rules by the AO, leading to the partial allowance of the appeal.