2015 (11) TMI 1369 - AT - Income Tax

Disallowance u/s 14A - Held that - The disallowance u/s.14A of the Act can be made only, if the expenditure is related to investment wherefrom the exempt income is earned. In the present case, the ld.CIT(A) has not considered the submissions of the assessee that investments have been out of interest-free fund, for commercial expediency and the dividend income has been offered for tax. Therefore, we are unable to confirm the finding of ld.CIT(A). In the light of above discussion, we hereby direct the AO to delete the addition - Decided in favour of assessee. Disallowance of 14 % interest being amount advanced to Shreenidhi Textiles by holding that there is difference between commercial expediency and humanitarian consideration - Held that - The contention of the assessee is that the advance was given out of interest-free funds. It is also contended that similar advances were made during the AY 2007-08, in that year no such disallowance was made. This contention was not made before the ld.CIT(A). Therefore, in our considered view, the contention of the ld.counsel for the assessee that had it sufficient interest-free funds and the advance was given out of interest-free funds requires verification at the end of the AO and, accordingly, we hereby set aside the order of the authorities below and restore this issue to the file of AO to verify whether the advance was out of interest-free funds available with the assessee or not. In case, the AO finds that the assessee was having sufficient interest-free funds, he should also delete the disallowance made in respect of advances given to Shree Nidhi Textiles. - Decided in favour of assessee for statistical purposes.

Summary

Issues involved:
- Appeals against orders of Commissioner of Income Tax (Appeals) for AYs 2008-09 & 2009-10
- Disallowance of expenses under section 14A r.w.r. 8D
- Disallowance of interest on advances made to another entity
- Verification of advances made out of interest-free funds

Analysis for AY 2008-09:
1. The Assessee appealed against the order of the Commissioner of Income Tax (Appeals) for AY 2008-09, challenging the disallowance of expenses under section 14A r.w.r. 8D. The Assessee argued that the investments were made for commercial expediency, not for earning exempt income. The Assessee contended that the subsidiary company's products were essential for its business, justifying the investments. The authorities upheld the disallowance, citing the Assessee's exempt income. However, the Tribunal found that the investments were made from interest-free funds and the dividend income was offered for tax, leading to the disallowance's deletion.

2. Another issue in AY 2008-09 was the disallowance of interest on advances to Shreenidhi Textiles. The Assessee claimed the advances were made from interest-free funds for commercial expediency. The authorities disallowed the interest, citing increased interest expenditure. The Tribunal directed the Assessing Officer to verify if the advances were indeed made from interest-free funds, emphasizing the need for proper verification before disallowing the amount.

Analysis for AY 2009-10:
1. In AY 2009-10, the Assessee challenged the disallowance of expenses under section 14A r.w.r. 8D, similar to the AY 2008-09 issue. The Assessee reiterated that the investments were for commercial expediency, not to earn exempt income. The Tribunal, consistent with the AY 2008-09 decision, allowed this ground, emphasizing the necessity of verifying the source of funds before disallowing expenses.

2. The AY 2009-10 also involved the disallowance of interest on advances to Shreenidhi Textiles. The Assessee argued that the advances were made from interest-free funds for commercial reasons. The Tribunal directed the Assessing Officer to verify the source of funds for these advances, echoing the AY 2008-09 decision. The Tribunal allowed this ground, stressing the importance of proper verification before disallowing expenses.

In both AYs, the Tribunal partially allowed the Assessee's appeals for statistical purposes, emphasizing the need for thorough verification of the source of funds before disallowing expenses. The judgments highlighted the importance of commercial expediency in investments and advances, urging proper examination by the Assessing Officer to ensure fair treatment of the Assessee.