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2017 (7) TMI 260 - AT - Income TaxDisallowance made u/s 14A - Held that - It has been demonstrated before us that there was enough own funds available with the assessee to make the impugned investments. The Balance Sheet of the assessee demonstrates that the investments had shown an increase from ₹ 478.77 crores to 571.67 crores i.e. an increase of ₹ 92.90 crores approximately, while a perusal of the Profit & Loss A/c for the year shows that the profit for the year earned by the assessee in itself was 342.98 crores, which was more than sufficient to make the investments during the year of ₹ 92.90 crores. Thus with respect to disallowance made u/s 8D(2)(ii) of the Act, pertaining to interest, the decision rendered by the I.T.A.T., Chandigarh Bench in the case of the assessee for assessment year 2008-09 squarely applies following which addition made on account of disallowance of interest u/s 14A is deleted. Disallowance of administrative expenses as per rule 8D(2)(iii)- we find that the assessee suo moto had made more disallowance on account of administrative expenses u/s 14A r.w.r. 8D(2)(iii) than what was directed by the Ld. CIT (Appeals), there is no reason for making any further disallowance and disallowance made is, therefore, deleted. Disallowance of interest made on account of difference of interest charged from Hero Motors on loan - Held that - assessee had enough and sufficient own funds to give the impugned loan and following the decision of the I.T.A.T. in assessee s case for assessment year 2009 10 it can be safely presumed that the loan had been given out of the own funds of the assessee and, therefore, called for no disallowance to be made on account of interest. Further has held by the I.T.A.T. in assessment year 2009 10, the Assessing Officer cannot sit in the arm chair of the assessee and decide the rate of interest at which the loan ought to have been given and moreover the Hon ble Supreme Court has also deleted the addition made on account of notional interest earned in assessee s case. Thus disallowance deleted Capitalization of interest on investment under the head Capital Work in Progress -Building under Construction - Held that - The investments made in capital work-in-progress in the impugned year amounted to ₹ 6,06,85,936/-. The profits earned by the assessee during the impugned year amounted to ₹ 342.98 crores. Thus the assessee had sufficient funds for the purpose of making investment in the capital work-in-progress and the decision rendered in assessee s case for assessment year 2009-10 will, therefore, squarely apply in the present case also following which we hold that no disallowance of interest on account of investment made in capital work-in progress is warranted and disallowance made to the extent of ₹ 2,78,564/- is, therefore, directed to be deleted. Disallowance of excessive commission expenses paid - assessee failed to explain the genuineness - addition u/s 40A(2)- Held that - No infirmity in the order of the Ld. CIT (Appeals) holding that the payment of commission was not excessive since it was approved by the Ministry of Corporate Affairs and by the Board Resolution and even accepted by the Revenue in the past years and had been paid at the same rate since 1962. The fact that Munjal Sales Corporation had been paying tax at the same rate as the assessee, the transaction was revenue neutral transaction and since Munjal Sales Corporation was not related person as per section 40(A)(2) of the Act, there was no case for making any disallowance at all, as held by the Hon ble Apex Court in the case of Glaxo Smithkline Asia (P) Ltd. (2010 (10) TMI 21 - Supreme Court of India). Thus disallowance deleted Disallowance made u/s 36(1)(iii) - Held that - Since the assessee was making consistent sale and purchase from these two concerns, any debit balance remaining in the accounts of these concerns cannot be presumed to be in the nature of loans and advances and, therefore, deletion of disallowance made u/s 36(1)(iii) confirmed. The appeal of the Revenue is dismissed.
Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules. 2. Disallowance of differential interest charged from Hero Motors Ltd. 3. Capitalization of interest on capital work in progress. 4. Disallowance of commission expenses paid to Munjal Sales Corporation. 5. Disallowance of interest under Section 36(1)(iii) for debit balances in the accounts of Hero Exports and Hero Motors Ltd. Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D: The assessee contested the disallowance of ?2,49,50,657/- u/s 14A. The Assessing Officer (AO) noted that the assessee earned exempt income and had significant investments, leading to disallowance under Rule 8D, which was partially upheld by the CIT(A). The ITAT found that the assessee had sufficient own funds to cover investments, relying on previous ITAT and High Court decisions. The ITAT concluded that no disallowance of interest was warranted under Rule 8D(2)(ii) and deleted the disallowance of administrative expenses as the AO had not recorded proper satisfaction. 2. Disallowance of Differential Interest Charged from Hero Motors Ltd: The AO disallowed ?55,57,069/- due to the differential interest rate charged on a loan to Hero Motors Ltd. The CIT(A) upheld the disallowance. However, the ITAT referred to its previous decision where it was held that the assessee had sufficient own funds to make the loan and that the rate of interest was a business decision. The ITAT deleted the disallowance, following the principle that revenue cannot dictate business decisions. 3. Capitalization of Interest on Capital Work in Progress: The AO capitalized interest of ?2,78,564/- on capital work in progress, which was upheld by the CIT(A). The ITAT referred to its earlier decision, noting that the assessee had sufficient own funds for capital investments. Following this precedent, the ITAT deleted the disallowance of interest on capital work in progress. 4. Disallowance of Commission Expenses Paid to Munjal Sales Corporation: The AO disallowed ?7,55,24,848/- of commission expenses paid to Munjal Sales Corporation, considering them excessive. The CIT(A) deleted the disallowance, noting that the commission was approved by the Board and the Ministry of Corporate Affairs, and the transaction was revenue neutral. The ITAT upheld the CIT(A)’s decision, emphasizing that Munjal Sales Corporation was not a related party under Section 40A(2) and the commission rate had been consistently accepted by the Revenue in past years. 5. Disallowance of Interest under Section 36(1)(iii) for Debit Balances in the Accounts of Hero Exports and Hero Motors Ltd: The AO disallowed ?2,09,66,994/- of interest, treating the debit balances as interest-free advances. The CIT(A) deleted the disallowance, and the ITAT affirmed this decision, noting that the transactions were regular business dealings and not loans. The ITAT reiterated that the AO cannot presume regular business transactions as loans and make disallowances under Section 36(1)(iii). Conclusion: The ITAT allowed the assessee's appeal partly by deleting disallowances under Section 14A, differential interest, and capitalization of interest. It upheld the CIT(A)’s deletion of disallowances for commission expenses and interest on debit balances, dismissing the Revenue's appeal.
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