2014 (5) TMI 592 - HC - Income Tax

Allowability of interest Held that - Revenue contended that the liability of the assessee to pay interest had arisen under the agreement dated 30 March 2000 - the CIT(A) and the Tribunal have noted that initially an agreement was entered on 30 March 2000 under which the outstanding dues of the assessee to TML in the amount of Rs.4.80 crores was squared off by the grant of a loan from Niskalp to the assessee for that purpose There was no reason to interfere with the order of the Tribunal - it was not a statutory liability of the assessee but a contractual dispute with the assessee under the agreement dated 30 March 2000 which eventually was resolved and the liability was crystallized only when the subsequent agreement dated 12 April 2007 was made Decided against Revenue. Disallowance u/s 14A of the Act Difference of opinion Held that - Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act - what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction - the assessee had not earned any tax free income - in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance - The view of the CIT(A), which has been affirmed by the Tribunal, does not give rise to any substantial question of law Decided against Revenue.

Summary

Issues:
1. Disallowance of interest under Income Tax Act, 1961.
2. Disallowance under Section 14A of the Income Tax Act.

Issue 1: Disallowance of Interest:
The case involved an appeal under Section 260-A of the Income Tax Act, 1961 concerning the allowance of interest of Rs.1,72,78,000 in the Assessment Year 2008-09. The dispute arose from an agreement dated 30 March 2000 between the assessee, Tata Motors Ltd., and Niskalp Investments & Trading Company Ltd. The assessee received a loan to pay outstanding dues, with interest set at 12% per annum. However, the assessee did not pay the interest, leading to a dispute resolved by a supplementary agreement in 2007 reducing the interest rate to 6%. The Assessing Officer disallowed the interest claim, citing the mercantile system of accounting. The CIT (A) and the Tribunal held that the liability to pay interest crystallized only upon the execution of the 2007 agreement, not in 2000. The Tribunal affirmed that the entries made by the assessee were in accordance with the law, rejecting the Revenue's argument that the liability arose in 2000.

Issue 2: Disallowance under Section 14A:
Regarding the disallowance under Section 14A of the Act, which prohibits deductions for expenses related to non-taxable income, the assessee had not earned any tax-free income in the relevant year. As a result, the corresponding expenditure for disallowance could not be calculated. The CIT (A) and the Tribunal upheld the deletion of the disallowance made by the Assessing Officer, as there was no tax-free income to trigger the disallowance. The judgment concluded that no substantial question of law arose from these issues, leading to the dismissal of the Revenue's appeal.

In summary, the High Court upheld the decisions of the CIT (A) and the Tribunal regarding the disallowance of interest and under Section 14A of the Income Tax Act, dismissing the Revenue's appeal as it did not raise any substantial question of law.