2017 (8) TMI 660 - AT - Income Tax

Addition u/s 14A - interest expenditure - CIT(A) made no disallowance in terms of Rule 8D(2)(ii) but restricted the disallowance to ₹ 5,97,861/- being 0.5% of the total investments in terms of the provisions of Rule 8D(2)(iii) - Held that - Assessing Officer could not produce before us any material or evidence, which may compel us to reverse the findings of the CIT(A). The CIT(A) has given a finding after appreciating the fact that no disallowance under Rule 8D(2)(ii) can be made in respect of the interest expenditure. We do not find any infirmity or illegality in the finding of the CIT(A). - Decided against revenue. Addition u/s 36(1)(iii) - interest on unsecured loans - Held that - No disallowance of interest on unsecured loans can be made. We also noted that the assessee had interest free surplus funds of ₹ 2447.49 lacs, which was sufficient to meet the investment made by the assessee in Hassan Biomass Company Pvt. Ltd. This fact is clearly borne out of the order of the CIT(A). The learned DR, even though relied on the order of the Assessing Officer, he could not contradict the fact that the interest free funds available with the assessee were much more than the investment made by the assessee in Hassan Biomass Company Pvt. Ltd. In view of this fact, the natural inference will be that the investment made amounting to ₹ 3,25,00,000/- in Hassan Biomass Company Pvt. Ltd. are not out of unsecured loan but out of interest free surplus funds available with the assessee. We, therefore, confirm the order of the CIT(A) deleting the disallowance made by the Assessing Officer u/s. 36(1) (iii) of the I T Act. Appeal filed by the Revenue is dismissed.

Summary

Issues:
1. Disallowance of expenditure under section 14A read with Rule 8D.
2. Disallowance of interest paid on unsecured loans under section 36(1)(iii).

Issue 1: Disallowance of expenditure under section 14A read with Rule 8D:
The Revenue filed an appeal against the CIT(A)'s order for A.Y. 2010-11, challenging the deletion of additions made on account of disallowance of ?12,00,781 under section 14A read with Rule 8D. The CIT(A) observed that no disallowance under Rule 8D(2)(ii) could be made in respect of interest expenditure. The CIT(A) restricted the disallowance to ?5,97,861, being 0.5% of the total investments in terms of Rule 8D(2)(iii). The Tribunal upheld the CIT(A)'s decision, noting that no material or evidence was presented to reverse the findings. The Tribunal dismissed the Revenue's appeal on this ground.

Issue 2: Disallowance of interest paid on unsecured loans under section 36(1)(iii):
The Assessing Officer disallowed interest paid by the assessee amounting to ?26,54,640 under section 36(1)(iii) of the I.T. Act, stating that the investment made in M/s Hassan Biomass Company Pvt Ltd. did not yield any apparent benefit. However, the CIT(A) deleted this disallowance. The Tribunal noted that the assessee had interest-free surplus funds of ?2447.49 lakhs, which covered the investment in Hassan Biomass Company Pvt. Ltd. The Tribunal agreed with the CIT(A) that no disallowance of interest on unsecured loans could be made, as the investment was not from unsecured loans but from interest-free surplus funds. Consequently, the Tribunal confirmed the CIT(A)'s decision to delete the disallowance of ?26,54,640. The appeal filed by the Revenue was dismissed.

This judgment addresses the disallowance of expenditure under section 14A read with Rule 8D and the disallowance of interest paid on unsecured loans under section 36(1)(iii). The Tribunal upheld the CIT(A)'s decision in both instances, emphasizing the absence of evidence to reverse the findings. The judgment highlights the importance of assessing the source of funds for investments and the relevance of interest-free surplus funds in determining the allowability of interest expenses.