2019 (2) TMI 1866 - AT - Income Tax

Addition u/s 36(l)(iii) on account of certain advances given - assessee had made investment by way of advance for purchase of plots/flats - HELD THAT - Assessee has demonstrated availability of sufficient own funds by pointing out that while the interest free advances given the assessee had made profits during the year which was more than sufficient for making the impugned advances. These facts have remained uncontroverted before us - assessee has all along contended that the Cash Credit account from which advances were made contained mixed funds with interest free funds being deposited immediately before the impugned advances being made. CIT(A) has taken a microscopic view of the entire issue resting his findings only on the fact that CC account is an interest bearing account. The fact that sufficient own funds were available with the assessee and they were in fact used for making the advance established the user of interest free funds for making the impugned advances calling for no disallowance of interest. But we find that despite specific pleading made by the assessee in this regard the same was not addressed by the CIT(A). Fact of interest free funds from the current account of the assessee being used for making the impugned advances, by transferring them to the cash credit account before the giving of advance ,as shown by the Ld.Counsel for the assessee before us, needs verification and examination. We therefore consider it fit to restore the issue back to the CIT(A) to examine, verify and consider the contention of the assessee and thereafter to decide the issue in accordance with law. Ground of appeal No.2 therefore is allowed for statistical purposes. Disallowance u/s 14A - disallowance of expenses made u/s 14A purportedly incurred for the purpose of earning exempt income - HELD THAT - Disallowance of interest expenses and administrative and other expenses incurred in relation to earning of exempt income u/s 14A read with Rule 8D(2)(ii) 8D(2)(iii) of the Income Tax Rules,1962(in short referred to as Rules ), respectively. No arguments have been made before us vis a vis disallowance of expenses made as per Rule 8D(2)(iii) of the Rules. The same is therefore upheld. As for the disallowance of interest as per Rule 8D(2)(ii), the arguments advanced by both the parties are identical to that advanced vis a vis disallowance of interest u/s 36(1)(iii) of the Act, with the assessee contending user of own funds for the purpose and the Revenue stating user of mixed funds. We have dealt with the arguments of both the parties at length at para 8-11 of our order above and our finding therein will apply to the present issue also.

Summary

Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.
2. Disallowance of expenses under Section 14A of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):

Facts and Arguments:
The assessee challenged the disallowance of interest amounting to ?22,28,644/- under Section 36(1)(iii) of the Income Tax Act. The Assessing Officer (A.O.) noted that the assessee had given an advance of ?2,06,39,953/- for the purchase of plots/flats without charging any interest and without any business purpose. The A.O. disallowed the proportionate interest on this advance, relying on the decision in CIT Vs. Abhishek Industries Ltd., 286 ITR 1 (P&H).

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the A.O.'s decision, stating that the advances were made from the interest-bearing Cash Credit (CC) account, indicating that borrowed funds were used for non-business purposes.

Before the Tribunal, the assessee argued that it had sufficient interest-free funds and had transferred funds from its current account (non-interest bearing) to the CC account before making the advances. The assessee relied on the Supreme Court's decision in Munjal Sales Corporation Vs. CIT & Anr., 298 ITR 298, and the ITAT Chandigarh Bench's decision in ACIT Vs. M/s Janak Global Resources Pvt. Ltd., ITA No.470/Chd/2018.

Tribunal's Findings:
The Tribunal found that the CIT(A) did not consider the assessee's argument regarding the availability of sufficient interest-free funds. The Tribunal referred to the Supreme Court's decision in Hero Cycles (P) Ltd. Vs. CIT, 379 ITR 347 (SC), which supports the "presumption theory" that if sufficient own funds are available, it is presumed that the same were used for making interest-free non-business advances.

The Tribunal distinguished the case of Avon Cycles Ltd., stating that it dealt with apportionment of expenses for exempt income under Section 14A and not the presumption of using own funds for non-business advances.

Conclusion:
The Tribunal restored the issue to the CIT(A) for verification of the assessee's claim that interest-free funds were used for making the advances. The ground of appeal was allowed for statistical purposes.

2. Disallowance of Expenses under Section 14A:

Facts and Arguments:
The assessee challenged the disallowance of expenses under Section 14A, which were purportedly incurred for earning exempt income. The A.O. noted that the assessee had investments in mutual funds amounting to ?2,97,66,540/- and earned exempt income of ?3,47,582/- during the year. The A.O. computed the disallowance under Rule 8D(ii) at ?66,013/- and under Rule 8D(iii) at ?1,48,768/-, totaling ?2,14,781/-.

The CIT(A) deleted the disallowance under Rule 8D(ii) for investments made from the current account but upheld the disallowance for the investment of ?5 lakhs made from the CC account. The CIT(A) also upheld the disallowance under Rule 8D(iii) due to lack of justification from the assessee.

Tribunal's Findings:
The Tribunal noted that the arguments for disallowance of interest under Section 14A were identical to those under Section 36(1)(iii). The Tribunal's findings and directions in the earlier issue applied here as well. The Tribunal restored the issue to the CIT(A) to consider afresh in light of the directions given for Section 36(1)(iii).

Conclusion:
The ground of appeal regarding disallowance under Section 14A was allowed for statistical purposes.

Final Order:
The appeal of the assessee was allowed for statistical purposes, with directions to the CIT(A) to re-examine the issues in accordance with the Tribunal's findings.