2016 (6) TMI 737 - AT - Income Tax

Disallowance u/s 14A - Held that - If there are interest free funds available a presumption would arise that investment would be out of interest free funds available. This view has also been endorsed by the Bombay High Court in a latest judgment in the case of HDFC Bank Ltd. Vs. DCIT (2016 (3) TMI 755 - BOMBAY HIGH COURT ), which was rendered in the context of disallowance under section 14A of the Act. Interestingly, in this case the High Court has reprimanded the Tribunal in not following an earlier judgment of the Court in the case of CIT Vs. HDFC Bank Ltd. (2014 (8) TMI 119 - BOMBAY HIGH COURT ), which in turn relying on the judgment of Reliance Utilities & Power Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT ), has held that owned funds being more than investments, it is to be presumed that these were made out of owned funds. Ironically, all the Landmark judgments relied on this case do not relate to the issue of section 14A of the Act.In view of the above, the Assessing Officer is directed to delete the addition made under section 14A of the Act. - Decided in favour of assessee Capitalization of interest towards machinery under installation account - Held that - There were certain machinery & building under construction during the year. The assessee had capitalized certain interest on acquisition of the same claiming that to an extent the amount was borrowed for acquisition of these. We are of the considered view that in case the assessee has given a plausible explanation with regard to the extent of interest being capitalized by it suo-moto, the Assessing Officer cannot make further addition without bringing on record any material to show the nexus between the amount borrowed and utilized for acquisition or construction of such asset. Nowhere in his order the Assessing Officer had been able to substantiate that the amount of interest capitalized by the assessee itself is not correct. Further, the explanation given by the assessee that it has huge owned funds to acquire such assets also has a bearing on the issue. In view of this, we direct the Assessing Officer to delete the disallowance.- Decided in favour of assessee Disallowance of interest on advances given to two parties - Held that - No evidence to show the business expediency for these advances could be filed. However, we must also add that from the reading of the Balance Sheet of the assessee, it is quite clear that the assessee possesses huge own funds, therefore, relying on the proposition laid down by the Jurisdictional Punjab & Haryana High Court in the case of Bright Enterprises Pvt. Ltd. (2015 (11) TMI 342 - PUNJAB & HARYANA HIGH COURT), we are inclined to hold that presuming in such fact situation that the money has been lent out of owned funds, no disallowance of interest is called for - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 14A/Rule 8D.
2. Capitalization of interest towards machinery under installation and building under construction.
3. Disallowance of interest on advances given to two parties.

Issue-Wise Detailed Analysis:

1. Disallowance under Section 14A/Rule 8D:
The assessee contested the disallowance of ?7,22,565 under Rule 8D(2)(ii) and ?65,594 under Rule 8D(2)(iii) made by the CIT(A). The assessee had shown investments of ?2,39,90,799 and claimed dividend income of ?20,47,190 as exempt under Section 10(34) of the Act. The Assessing Officer (AO) computed a disallowance of ?8,42,519 under Rule 8D, adjusting for a suo-moto disallowance of ?50,000 made by the assessee. The CIT(A) confirmed the disallowance despite the assessee’s argument that sufficient owned funds were available to cover the investments. The assessee relied on the ITAT Chandigarh Bench’s decision in the case of Hero Cycles Ltd., which presumed investments were made from owned funds if sufficient owned funds were available. The Tribunal agreed with the assessee, holding that no disallowance on account of interest could be made due to the presence of substantial owned funds. Additionally, the Tribunal found the AO had not recorded any satisfaction regarding the incorrectness of the suo-moto disallowance, rendering the disallowance untenable.

2. Capitalization of Interest Towards Machinery Under Installation and Building Under Construction:
The assessee challenged the capitalization of ?1,14,096 towards machinery under installation and ?7,55,888 towards building under construction. The AO noted secured loans of ?23,11,33,892 and interest expenditure of ?2,75,14,294. The assessee had already capitalized interest on machinery worth ?2,54,24,957 and on building under construction. The AO further capitalized interest, which was upheld by the CIT(A). The assessee argued that sufficient owned funds were available, and the interest had already been appropriately capitalized. The Tribunal found that the AO had not substantiated the nexus between borrowed funds and the acquisition of assets. The Tribunal directed the AO to delete the disallowance, accepting the assessee’s explanation and acknowledging the presence of substantial owned funds.

3. Disallowance of Interest on Advances Given to Two Parties:
The assessee contested the disallowance of ?6,083 under Section 36(1)(iii) for interest-free loans given to two individuals, claiming these were for business purposes. The AO made the disallowance, and the CIT(A) upheld it, stating business funds were diverted. The assessee argued that the advances were for material supply and that sufficient owned funds were available. The Tribunal found no evidence of business expediency for the advances but noted the presence of substantial owned funds. Relying on the Jurisdictional Punjab & Haryana High Court’s decision in Bright Enterprises Pvt. Ltd., the Tribunal held that no disallowance of interest was warranted, presuming the advances were made from owned funds.

Conclusion:
The appeal was partly allowed, with the Tribunal directing the deletion of disallowances under Section 14A and for capitalization of interest, while also ruling in favor of the assessee regarding the disallowance of interest on advances given to two parties. The grounds not pressed by the assessee were dismissed, and general grounds required no adjudication.