2015 (10) TMI 2718 - AT - Income Tax

Disallowance of finance charges - utilization of loans taken - nexus of interest expenditure with the income earned - Held that - The income of the assessee consisted of consultancy fee, royalty income, trade mark fee, share of profit& interest on capital from firm, dividend income etc. A.R also fairly admitted that the funds were taken from Vithal Kamat (HUF) over the years in many instalments and they have been utilized for all the purposes. Thus, the exact utilization of loans taken from Vithal Kamat (HUF) could not be proved at this stage. Hence, as submitted by Ld D.R, the nexus of interest expenditure with the income earned by the assessee could not be established by the assessee. Thus the Ld CIT(A) was justified in confirming the disallowance of interest expenditure. - Decided in favour of revenue Disallowance u/s 14A - Held that - The finance charges was disallowed u/s 36(1)(iii) and hence the same has already been excluded by the Ld CIT(A). The remaining expenses, in our view, could not be linked to the dividend income. Hence we agree with the contentions of Ld A.R that no disallowance of expenditure is called for in terms of Rule 8D(2)(iii) of the I.T Rules. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to delete the disallowance of expenses confirmed by Ld CIT(A) u/s 14A - Decided in favour of assessee

Summary

Issues:
1. Disallowance of finance charges of Rs. 6,54,509/-
2. Disallowance u/s 14A of the Act

Analysis:

Issue 1: Disallowance of Finance Charges
The appellant challenged the disallowance of finance charges of Rs. 6,54,509 under section 36(1)(iii) of the Act. The Assessing Officer (AO) disallowed the interest claim as the appellant failed to prove that the borrowed funds were used for earning income. The appellant's argument that the funds were used for business activities was deemed unconvincing. The appellant's submission that loans from banks were used to repay a loan from Vithal Kamat (HUF) was presented. However, it was noted that the exact utilization of the loans could not be proven. The tribunal agreed with the AO that the nexus between the interest expenditure and the income earned was not established, leading to the confirmation of the disallowance.

Issue 2: Disallowance u/s 14A of the Act
The second issue pertained to the disallowance made under section 14A of the Act. The AO calculated the disallowance using Rule 8D of the IT Rules, resulting in a disallowance of Rs. 6,52,604. The Commissioner (CIT-A) deleted the interest portion of the disallowance but upheld the expenditure disallowance of Rs. 2,81,826. The appellant argued that the expenses claimed were not related to the dividend income earned. The tribunal agreed, noting that the expenses could not be linked to the dividend income. Consequently, the tribunal directed the AO to delete the disallowance of expenses of Rs. 2,81,826 confirmed by the CIT(A) under section 14A of the Act.

In conclusion, the tribunal partially allowed the appeal, emphasizing the importance of establishing a clear connection between expenses claimed and income earned to avoid disallowances under the relevant provisions of the Act.