2018 (4) TMI 1880 - AT - Income Tax

Disallowance U/s.14A r.w.r.8D - HELD THAT - Section 14A of the Act only specifies that no deduction shall be allowable in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. It does not specify with respect to expenditure incurred on taxable income. Therefore in the case where assessee incurs revenue expenditure towards Investments the income from which is taxable the provisions of Section 14A of the Acted does not apply. Hence the Investments made by the assessee wherein the income derived is taxable provisions of Section 14A of the Act are not applicable. The decision rendered by the Delhi Benches of the Tribunal in the case ACIT ANR v/s. Vireet Investment PVT.LTD. ANR 2017 (6) TMI 1124 - ITAT DELHI also fortify our view wherein it was held that As per Rule 8D(2)(iii) only those investments were to be considered for computing average value of investment which yielded exempt income during year under consideration. Accordingly we hereby direct the Ld.AO to compute the disallowance U/s.14A r.w.r. 8D(2)(iii) of the Rules only on the investment which yield exempt income. Disallowance of interest expenditure u/s.36(1)(iii) - HELD THAT - When the assessee has own interest free funds such as share capital and reserves surplus it should be presumed that the interest free loan was extended from such funds. The decision relied by the Ld.AR is applicable to the facts of the case present before us. The decisions relied by the Ld.DR are not identical to the facts of the case because all those cases was related to diversion of interest bearing funds. Therefore following the ratio of the decision relied by the Ld.AR we hereby direct the Ld.AO to delete the addition made by the Ld.AO by holding that the assessee had advanced interest free loan from non-interest bearing funds.Appeal of the assessee is allowed.

Summary

Issues:
1. Disallowance under Section 14A r.w.r. 8D of the Rules
2. Disallowance of interest expenditure under Section 36(1)(iii) of the Act

Issue 1: Disallowance under Section 14A r.w.r. 8D of the Rules:

The appellant contested the disallowance of ?9,42,885 under Section 14A r.w.r. 8D of the Rules, arguing that only investment yielding exempt income should be considered for calculating disallowance. The Ld.CIT(A) had confirmed the disallowance, but the ITAT Chennai held that Section 14A of the Act does not apply to investments yielding taxable income. Citing the decision in ACIT & ANR v/s. Vireet Investment PVT.LTD. & ANR, the ITAT directed the AO to compute the disallowance only on investments yielding exempt income.

Issue 2: Disallowance of interest expenditure under Section 36(1)(iii) of the Act:

The AO disallowed interest expenditure of ?13,92,463 under Section 36(1)(iii) of the Act, attributing it to interest-free advances extended by the assessee. The Ld.CIT(A) upheld the disallowance, citing various court decisions. The appellant argued that with substantial interest-free funds, the disallowance was unwarranted. The ITAT agreed, referencing the decision in CIT vs. Hotel Savera and CIT vs. Reliance Utilities & Power Ltd. The ITAT directed the AO to delete the addition, as the interest-free loan was presumed to be extended from non-interest bearing funds.

In conclusion, the ITAT Chennai allowed the appeal of the assessee, directing the AO to calculate disallowances under Section 14A r.w.r. 8D only on investments yielding exempt income and to delete the disallowance of interest expenditure under Section 36(1)(iii) as the loan was presumed to be extended from non-interest bearing funds.