2016 (5) TMI 1017 - AT - Income Tax

Disallowance u/s 14A - contention of ld.D.R being the restriction of interest component as per Rule 8D(2) is not viable and supported with the arguments relying on the various decisions - Held that - Assessee being the NBFC and it is regular practice to make investments in the shares and securities and assessee also disallowed amount suo moto under Rule 8D. So considering the provisions and submissions of Counsels we are of the opinion that the Ld.CIT(A) had dealt with the issue in detail and also considered the submissions and explanations of the assessee, Therefore, we are not inclined to interfere with the order of the Ld.CIT(A) and confirm the same. On the issue of notional interest considering the fact of the case is that assessee has provided interest free advances to its sister concern, which is not disputed by the lower authorities and during the assessment proceedings, the assessee provided the particulars of income of the assessee for giving interest free loan and on perusal of the statement revealed that the assessee has surplus funds and loans are advanced out of internal accruals and profits made from sale of shares and were reflected in the balance sheet. The Ld.D.R though accepted the contention, did not accept the notional interest, which has not arised to the assessee s case. Therefore, the findings of Ld.CIT(A) in deleting the addition is proper and accordingly,we upheld the order of Ld.CIT(A) on this ground. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Adjustment to book profits under Section 115JB of the Income Tax Act.
3. Notional interest on interest-free loans given to a sister concern.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:

The Revenue contended that the CIT(A) erred in restricting the disallowance made under Section 14A to the extent of limb (ii) of Rule 8D(2). The CIT(A) failed to consider the impact of interest accrued on an interest-free loan given to M/s. Hitech Housing Projects Pvt. Ltd. The CIT(A) should have followed the decision of the Hon’ble Madras High Court in the case of M/s. United Nilgiris Tea Estate Company, which held that interest accrued had to be assessed even if not received. The assessee argued that the CIT(A) erred in upholding the disallowance under Section 14A by applying Rule 8D without noting that the AO failed to record any satisfaction that the voluntary disallowance made by the assessee was incorrect.

The Tribunal noted that the AO made a disallowance under Section 14A of ?29,52,927 based on Rule 8D(ii). The CIT(A) restricted the disallowance to the extent of limb (iii) of Rule 8D(2), citing that the assessee had sufficient own funds and no loan was obtained to make the investments. The Tribunal upheld the CIT(A)'s decision, agreeing that the disallowance under Rule 8D(iii) was in order.

2. Adjustment to Book Profits under Section 115JB of the Income Tax Act:

The assessee argued that the CIT(A) erred in upholding the adjustment to book profits computed under Section 115JB towards disallowance made under Section 14A by applying Rule 8D. The CIT(A) upheld the adjustment based on clause (f) of Explanation-1 to Section 115JB, which states that the amount of expenditure relatable to exempt income should be added back to the book profit.

The Tribunal agreed with the CIT(A), noting that the provisions of Section 115JB and Explanation-1 clause (f) were correctly applied, and the disallowance under Section 14A was rightly brought to book profit calculations.

3. Notional Interest on Interest-Free Loans Given to a Sister Concern:

The Revenue contended that the CIT(A) erred in deleting the disallowance of notional interest on interest-free loans given to M/s. Hitech Housing Pvt. Ltd. The CIT(A) failed to appreciate that in the business of Non-Banking Finance Companies (NBFCs), distinguishing between business and non-business activity is not feasible. The CIT(A) should have upheld the disallowance in the absence of evidence of business and non-business activity.

The Tribunal noted that the AO made an addition of notional interest of ?1,54,82,876 on the interest-free advances given to the sister concern. The CIT(A) found that the assessee had sufficient own funds and the loan from JMF was exclusively for trading in shares. Therefore, the notional interest disallowed by the AO was not warranted. The Tribunal upheld the CIT(A)'s decision, agreeing that the addition of notional interest was not justified.

Conclusion:

The Tribunal dismissed the appeal of the Revenue and the cross objections filed by the assessee. The Tribunal upheld the CIT(A)'s decisions on all issues, confirming the restriction of disallowance under Section 14A to limb (iii) of Rule 8D(2), the adjustment to book profits under Section 115JB, and the deletion of notional interest on interest-free loans given to the sister concern.