2012 (11) TMI 1325 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest on TDS.
2. Disallowance u/s 14A read with Rule 8D.
3. Disallowance u/s 36(1)(iii).

Summary:

1. Disallowance of Interest on TDS:
The first ground of appeal for A.Y. 07-08 concerns the confirmation of disallowance of interest on TDS amounting to Rs. 1,05,005/-. The Assessee had claimed this interest, which was disallowed by the A.O. and upheld by the CIT(A) on the basis that such interest is compensatory for the late payment of TDS to the Government treasury. The Tribunal, referencing the case of East India Pharmaceutical Works Ltd. v. CIT, dismissed the appeal, affirming that the interest on late payment of TDS is compensatory and not allowable as a deduction.

2. Disallowance u/s 14A read with Rule 8D:
The second ground pertains to the disallowance u/s 14A read with Rule 8D amounting to Rs. 22,98,627/- for A.Y. 07-08 and Rs. 3,62,210/- for A.Y. 09-10. The A.O. found that the Assessee had taken loans and made investments that earned tax-free income. The disallowance was calculated under Rule 8D, which was contested by the Assessee. The CIT(A) upheld the disallowance, referencing the ITAT Special Bench decision in Daga Capital Management Pvt. Ltd. The Tribunal, however, allowed the appeal for A.Y. 07-08, stating that Rule 8D is prospective and applicable from A.Y. 08-09 onwards, and no direct nexus was established by the A.O. For A.Y. 09-10, the Tribunal confirmed the disallowance as Rule 8D was applicable and the Assessee did not point out any defect in the A.O.'s computation.

3. Disallowance u/s 36(1)(iii):
The remaining ground for A.Y. 09-10 involves the confirmation of disallowance amounting to Rs. 3,20,600/- u/s 36(1)(iii). The A.O. disallowed the interest on loans given to certain parties without charging interest, while the Assessee was paying interest on borrowed funds. The CIT(A) upheld the disallowance, stating that the Assessee failed to prove the nexus between interest-free advances and interest-free funds. The Tribunal, however, deleted the addition, noting that the Assessee had substantial interest-free funds and no direct nexus was established by the A.O. between the interest-bearing loans and the interest-free advances.

Conclusion:
In the combined result, the Assessee's appeals were partly allowed. The Tribunal dismissed the appeal on the disallowance of interest on TDS, allowed the appeal on disallowance u/s 14A for A.Y. 07-08, confirmed the disallowance u/s 14A for A.Y. 09-10, and deleted the disallowance u/s 36(1)(iii).