2011 (5) TMI 1142 - AT - Income Tax

Summary

Issues Involved: Appeal against CIT (Appeals) order for assessment year 2006-07. Grounds of appeal: 1. Deletion of addition of interest on investment in shares u/s 14A. 2. Deletion of addition of interest on debit balance of partners u/s 36(1)(iii).

Issue 1 - Interest on Investment in Shares u/s 14A:
The assessee firm, engaged in manufacturing Hawai Chappals, contested the addition of Rs.18,00,081 on interest paid for investments in Lakhani India Limited shares u/s 14A. The ITAT referred to the Godrej & Boyce case where it was held that disallowances u/s 14A should be on a reasonable basis. The ITAT noted the CIT (A) relied on the S.A. Builders Limited case, stating no disallowance if interest-free advances are from capital or profits. The ITAT set aside previous orders to calculate disallowances reasonably.

Issue 2 - Interest on Debit Balance of Partners u/s 36(1)(iii):
Regarding the deletion of Rs.3,25,674 addition on interest on partners' debit balance u/s 36(1)(iii), the ITAT upheld the CIT (A) decision based on the Abhishek Industries Limited case. It was observed that there was no interest debited on partners' credit balance, and no nexus between borrowed funds and non-business use. Consequently, the ITAT sustained the CIT (A) order and dismissed the revenue's appeal on this ground.

Conclusion:
The ITAT partly allowed the revenue's appeal for statistical purposes, emphasizing no fault in the CIT (A) orders regarding both issues. Ground no.3, being general, did not require adjudication. The judgment was pronounced on May 27, 2011.