2016 (8) TMI 1371 - AT - Income Tax

Disallowance u/s 14A r.w.r.8D - Held that - It is noted that the investment worth 3. 37 crores have been made by the assessee in the earlier years and not in the year under consideration. Even if one were to consider the availability of interest free funds during the year it is noted that partner s capital account is worth 115.70 crores. The secured loans availed by the assessee in form of Packing Credit Limit (PCL) and Post Shipment Export Finance (PSEF) from various bank are exclusively for the purpose of purchase of raw material payment of labour charges and other direct expenses and which thus have a end-use restriction and monitoring by the banks towards the manufacturing and export activity of the appellant. Thus giving the availability of interest free funds over and above the secured loans and also the fact that the secured loans had a specific end-use restriction the investments have been made from its internal accruals in the earlier years and given that no expenditure has been incurred no disallowance u/s 14A is warranted.

Summary

Issues:
1. Disallowance under section 14A r.w.r. 8D
2. Disallowance of business promotion expenses on estimation basis

Issue 1: Disallowance under section 14A r.w.r. 8D
The appellant contested the disallowance under section 14A r.w.r. 8D to the extent of ?5,21,464. The Assessing Officer disallowed an amount of ?7,89,006 under section 14A of the Act, which was later adjusted to ?5,21,464 by the CIT(A). The appellant argued that the disallowance should be calculated on the net interest expense of ?6,77,78,410, based on a decision by the Hon'ble ITAT Bench Delhi in a similar case. The appellant further contended that no disallowance should be made under section 14A if the primary purpose of the investment is to hold a controlling stake in a group concern rather than earning tax-free income. The appellant also highlighted that the interest paid was for borrowing facilities used in foreign currency loans exclusively for business purposes. The Tribunal agreed with the appellant's arguments, noting that investments were made from internal accruals in earlier years, and no disallowance under section 14A was warranted.

Issue 2: Disallowance of business promotion expenses on estimation basis
The appellant also challenged the disallowance of ?51,077 as 10% of business promotion expenses on an estimation basis. During the hearing, the appellant did not press for this ground, leading to its dismissal as not pressed. Consequently, this issue was not further deliberated upon in the judgment.

In conclusion, the appeal filed by the assessee was partly allowed, with ground no. 1 being allowed and ground no. 2 being dismissed as not pressed. The Tribunal ruled in favor of the appellant regarding the disallowance under section 14A, emphasizing the availability of interest-free funds and the specific end-use restriction on secured loans for manufacturing and export activities. The judgment highlighted relevant legal precedents supporting the appellant's case and concluded that no disallowance under section 14A was justified based on the circumstances presented during the proceedings.