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2017 (11) TMI 1818 - AT - Income Tax


Issues:
1. Disallowance of interest under section 36(1)(iii) on advances.
2. Deletion of the addition made under section 14A of the Income Tax Act.

Issue 1: Disallowance of Interest under Section 36(1)(iii) on Advances:
The Assessing Officer questioned the expenditure claim under section 36(1)(iii) of the Income Tax Act, 1961, as the assessee had significant investments. The CIT(A) upheld the addition, stating that the investments were not for business purposes. However, the assessee argued that the investments were made for commercial expediency and utilized own funds for the purpose. The AR highlighted the company's financial details to support the claim that own funds were used for investments, hence no disallowance of interest was warranted. Citing various judicial pronouncements, including cases like Bright Enterprises Pvt. Ltd. Vs. CIT and Hero Cycles Pvt. Ltd., it was concluded that if there are sufficient interest-free funds available, no disallowance should be made. Consequently, the disallowance of interest was deleted.

Issue 2: Deletion of the Addition under Section 14A of the Income Tax Act:
The Assessing Officer disallowed an amount under section 14A of the Income Tax Act based on Rule 8D(2) calculations. The CIT(A) deleted the addition based on decisions from previous assessment years and directed the AO to consider the disallowance while calculating book profits under section 115JB. The Revenue contended that the assessee did not maintain separate accounts for investments and exempt income, and argued against the deletion of the addition. However, the AR emphasized that the disallowance under section 14A should not exceed the exempt income earned. Referring to judgments like Joint Investments Pvt. Ltd. Vs. CIT, it was established that the disallowance cannot exceed the exempt income. Consequently, the disallowance under section 14A read with Rule 8D was restricted to the exempt income earned by the assessee, and the appeal of the Revenue was allowed for statistical purposes.

In conclusion, the appeal of the assessee was allowed regarding both issues, while the appeal of the Revenue was allowed for statistical purposes.

 

 

 

 

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