2016 (2) TMI 618 - AT - Income Tax

Disallowance u/s 14A - CIT(A) allowed the claim - grievance of the revenue is that the Rule 8D should be followed and prorate interest payable on borrowings should disallowed, even if the Assessee had sufficient owned funds for making the investments - Held that - As from a reading of the ratio of various High Courts on this aspect only actual expenditure which can be attributed to Investments and that too only investments from which exempt income has been earned and excluded in the assessment, has to be disallowed u/s 14A. In the circumstances we have no hesitation in upholding the decision of the CIT(A) deleting the notional disallowance of interest expenditure made u/s 14A by the AO. - Decided against revenue Disallowance of interest being interest payable by the Assessee on account of interest free advances - CIT(A) therefore held interest attributable is not disallowable and deleted the addition - only grievance of the Revenue is that the facts relating to the Interest free advance given to BSSL Ltd was not submitted before AO - Held that - even if it is assumed that this advance was given out of borrowed funds, no part of the interest payable on such notional amount of borrowings cannot be disallowed as the advance was given in the course of business. Therefore on the facts of the case, Applying the ratio of the decisions of the Bombay High Court in the case of CIT v. Reliance Utilities And Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT we hold that the interest free advance of ₹ 7.5 Crores to BSSL was made by the Assessee out of own funds and the advance was for the purpose of the business of the Assessee in the course of Joint development of property with BSSL. Hence no part of interest payable on borrowings can be disallowed on grounds of interest free advance of ₹ 7.5 Crores to BSSL. The revenue s appeal on this issue is dismissed. - Decided against revenue

Summary

Issues:
1. Disallowance of interest under sec 14A read with Rule 8D
2. Disallowance of interest on interest-free advances

Issue 1: Disallowance of interest under sec 14A read with Rule 8D:
The appeal concerned the disallowance of &8377; 13,67,830 under sec 14A read with Rule 8D(ii) by the CIT(A), which the Revenue contested. The Revenue argued that prorate interest payable on borrowings should be disallowed, regardless of the Assessee's owned funds. The Tribunal referred to the Delhi High Court's ruling, emphasizing that the Assessing Officer must first examine the Assessee's claim before resorting to Rule 8D. The Tribunal upheld the CIT(A)'s decision, stating that only actual expenditure related to investments yielding exempt income should be disallowed under sec 14A.

Issue 2: Disallowance of interest on interest-free advances:
The second ground of appeal involved the deletion of &8377; 1,17,12,000 disallowance of interest on interest-free advances given by the Assessee to another entity. The AO contended that the transaction was an accommodation entry and taxed the interest on the advance. However, the CIT(A) found that since the Assessee had sufficient non-interest bearing funds, no interest disallowance was warranted. The Tribunal agreed with the CIT(A), stating that the advance was for business purposes and out of commercial expediency, thus no interest payable on borrowings could be disallowed.

In conclusion, the Tribunal dismissed the Revenue's appeal on both issues, upholding the CIT(A)'s decisions. Additionally, the cross objection by the assessee was allowed for statistical purposes.