2016 (4) TMI 857 - AT - Income Tax

Disallowance u/s.14A - Held that - Since in the instant case the own capital and free reserves of the assessee company is much more than the investment in shares of group companies and associate concerns and since the assessee has not received any dividend income during the year, therefore,we are of the considered opinion that no disallowance u/s.14A on account of interest can be made. We accordingly set aside the order of the CIT(A) on this issue. However, the incurring of administrative expenses for investment in the share cannot be ruled out. The AO has already made an addition of ₹ 12,000/- on estimate basis, therefore, the same has to be upheld. Accordingly, the addition sustained by the CIT(A) to the extent of ₹ 1,90,70,249/- u/s.14A is directed to be deleted. - Decided partly in favour of assesse Disallowance of depreciation, interest and administrative expenses - purchase of flat in the name of director by the company - Held that - AO has accepted the ownership of the property in the hands of the company and for the purpose of business. - Claim of the assessee allowed - Decided in favor of assessee.

Issues Involved:
1. Disallowance of interest and other expenses related to flats at Khar, Mumbai.
2. Disallowance of interest under Section 14A/Section 36(1)(iii) of the Income Tax Act.

Issue 1: Disallowance of Interest and Other Expenses Related to Flats at Khar, Mumbai

Analysis:
The assessee, a Private Limited Company engaged in the manufacture and dealing of gold and gold ornaments, filed its return of income for the Assessment Year 2007-08. The Assessing Officer (AO) noted that the assessee had purchased a duplex flat at Khar, Mumbai, in the names of two directors, and claimed interest and other expenses related to these flats. The AO disallowed these expenses on the grounds that the flats were not owned by the company but by the directors, and there was no evidence of business use.

The CIT(A) upheld the AO's decision and further enhanced the disallowance by Rs. 31,71,672/- on the grounds of diversion of funds for non-business purposes. The CIT(A) concluded that the flats were purchased by the directors in their individual capacities and not by the company, despite the company's claim that the flats were used for business purposes.

The assessee argued that the flats were purchased in the names of the directors for convenience, and the cost was borne by the company, making the company the de facto owner. The assessee also contended that the flats were used for business purposes and that the interest and other expenses should be allowed as business expenditures.

The Tribunal found merit in the assessee's submissions, noting that the flats were shown in the asset side of the company's balance sheet and the loan was shown as a liability. The Tribunal also noted that the AO had allowed depreciation on the flats, indicating acceptance of the flats as business assets. Citing various judicial precedents, the Tribunal concluded that the disallowance of interest and other expenses related to the flats was not justified and allowed the assessee's appeal on this ground.

Issue 2: Disallowance of Interest under Section 14A/Section 36(1)(iii) of the Income Tax Act

Analysis:
The AO disallowed Rs. 1,90,82,249/- under Section 14A, noting that the assessee had invested in shares of group companies using borrowed funds and claimed interest on these funds as a business expense. The AO applied Rule 8D to calculate the disallowance, which was upheld by the CIT(A).

The assessee argued that the investment in shares was made from its own capital and free reserves, which were more than the investment amount. The assessee also contended that no dividend income was received during the year, making Section 14A inapplicable. The assessee cited various judicial decisions to support its claim that no disallowance should be made under Section 14A in the absence of exempt income.

The Tribunal noted that the assessee's own capital and free reserves were significantly higher than the investment in shares and that no dividend income was received during the year. The Tribunal cited judicial precedents, including the Bombay High Court's decision in Reliance Utilities and Power Ltd., which held that if interest-free funds are available, it should be presumed that investments are made from these funds. The Tribunal also referred to the Delhi High Court's decision in Cheminvest Ltd., which held that no disallowance under Section 14A should be made in the absence of exempt income.

Based on these findings, the Tribunal concluded that no disallowance under Section 14A on account of interest was warranted. However, the Tribunal upheld the AO's addition of Rs. 12,000/- for administrative expenses related to the investment in shares. The Tribunal directed the deletion of the disallowance of Rs. 1,90,70,249/- under Section 14A.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the disallowance of interest and other expenses related to the flats at Khar, Mumbai, and partially allowed the appeal regarding the disallowance under Section 14A, directing the deletion of the disallowance of Rs. 1,90,70,249/- while upholding the addition of Rs. 12,000/- for administrative expenses. The appeal was thus partly allowed.

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