2018 (3) TMI 2017 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - CIT(A) deleted the addition - HELD THAT - Admittedly assessee has not earned any exempt income during the year under consideration, accordingly we do not find any infirmity in the observations of Ld. CIT(A) in deleting the addition made by Ld.AO in respect of the disallowances computed u/s 14A. Interest free loan advanced to sister concern u/s 36(1)(iii) - assessee has diverted its interest bearing funds to its related person and accordingly interest @ 10.75% on interest free loans is disallowed - HELD THAT - As decided in assessee s own case for assessment year 2009-10 and 2010-11 CIT(A) has deleted the disallowance on the basis that nexus between interest bearing funds and interest free advance as well as adequacy of interest free fund available with the assessee, have not been analysed by the A.O. during the assessment proceedings, nor the explanation given by assessee that the loan was given for business purpose has been rebutted by the A.O. CIT(A) has concluded that the assessee having adequate non-interest bearing funds, it can be inferred that the loan given has no bearing on the interest expense claimed by assessee on borrowed funds. In absence of rebuttal of above stated material finding given by Ld.CIT(A) on the issue even before the Tribunal, we do not find reason to interfere with the first appellate order, which is comprehensive and reasoned one as well as supported by the ratio laid down in the above cited decisions Decided in favour of assessee. Addition being loan amount written off given to sister concern - AO disallowed alleged amount as the said amount written off was not taken as income in any preceding year, assessee is not in the business of giving loans, and that, conditions laid down in section 36(2) of the Act were not fulfilled - HELD THAT - In the present case the write off of loss has not arisen during the course of business of assessee as money lending is not the activity that is carried on by assessee and it has never been the claim of assessee nor it has been proved before the authorities below. There has been no evidence that is placed on record to prove that the loss has occurred during the year. Therefore the claim of loss by assessee does not hold good on both these counts. The reasons given by CIT (A) to allow the claim as business loss are irrelevant and is without considering the provisions of the Act. CIT (A) also accepted that the issue stands covered in the favour of assessee by the decision of Hon ble Gujarat High Court in the case of Manohar N Shah 2005 (10) TMI 37 - GUJARAT HIGH COURT - loss was proved to have been arisen during the year which was actually a business loss. Therefore we are inclined to reverse the findings of Ld. CIT (A) and restore the order of Ld. AO. Decided in favour of revenue.

Summary

Issues Involved:
1. Deletion of disallowance under section 14A of the Income Tax Act.
2. Deletion of disallowance of interest on account of interest-free loan to sister concern.
3. Deletion of disallowance of bad debt on account of write-off of loan to sister concern.

Issue-wise Detailed Analysis:

1. Deletion of disallowance under section 14A of the Income Tax Act:
The Department challenged the deletion of a disallowance amounting to Rs. 2,23,000/- under section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules. The Ld. CIT(A) deleted the disallowance on the grounds that the assessee had not earned any exempt income during the year under consideration. The Tribunal upheld this decision, referencing the Hon’ble Delhi High Court's decision in Cheminvest Ltd vs. CIT, which established that no disallowance under section 14A is warranted if no exempt income is earned during the relevant year.

2. Deletion of disallowance of interest on account of interest-free loan to sister concern:
The Department contested the deletion of an addition of Rs. 30,93,336/- related to interest-free loans given to a sister concern. The Ld. CIT(A) deleted the addition, stating that the loans were given to promote business and were funded from internal accruals, not borrowed funds. The Tribunal confirmed this decision, noting that the issue had been similarly resolved in favor of the assessee in previous assessment years (2009-10 and 2010-11). The Tribunal cited the Hon’ble Supreme Court's decision in S.A. Builders, which supports the view that loans given for commercial expediency should not be disallowed.

3. Deletion of disallowance of bad debt on account of write-off of loan to sister concern:
The Department appealed against the deletion of an addition of Rs. 57,19,974/- related to the write-off of a loan to a sister concern. The Ld. CIT(A) allowed the write-off as a business loss under section 28(i), given that the sister concern had become a sick company. However, the Tribunal reversed this decision, noting that the loan write-off did not satisfy the conditions of section 36(2) of the Act, as the assessee was not in the business of money lending, and there was no evidence that the loss occurred during the year. The Tribunal concluded that the reasons given by Ld. CIT(A) were irrelevant and restored the order of the Ld. AO.

Conclusion:
The appeal filed by the revenue was partly allowed. The Tribunal upheld the deletion of disallowances under section 14A and for interest-free loans to sister concerns, but it reversed the deletion of the disallowance for the bad debt write-off, restoring the original assessment order.