2017 (8) TMI 1058 - AT - Income Tax

Determination of disallowance u/s 14A r w Rule 8D - Held that - The decision of CIT Vs Shivam Motors judgement 2014 (5) TMI 592 - ALLAHABAD HIGH COURT where it was held the in the absence of any interest free income there cannot be any disallowance as no corresponding expenditures were incurred to earn a particular tax free income in above circumstances and in view of the above decisions that assessee has not claimed exempt income. So no disallowance can be made. Therefore the addition made by the AO was rightly deleted by the Ld. CIT(A) in view of the extant law on the subject presently settled by judicial precedents from the courts. - Decided in favour of assessee. Addition u/s. 36(1)(iii) on account of interest expenses on business advance for purchase of equity shares out of borrowed funds - Held that - As observed from the appellant s submission that the investment in M/s. Globus Industries & Services ltd was to increase its stake in that company which is in the line of manufacture and sale of edible oils Vanaspati etc. There appears to be no finding of the fact that M/s. Globus Industries & Services ltd. and the appellant are sister concerns. Finally even in the impugned order the business of the appellant includes trading in Vanaspati and edible oils. Accordingly considering all these observations and arguments the disallowance of interest u/s 36(1)(iii) made in the impugned order by working out the average rate of interest at 12% on the interest-free advance of Rs. 368.56 lacs ( Rs. 44, 22, 7201-) was rightly deleted by the Ld. CIT(A) which does not need any interference - Decided in favour of assessee.

Issues Involved:
1. Deletion of disallowance under Section 36(1)(iii) of Rs. 44,22,720/- on account of interest expenses on business advance for the purchase of equity shares out of borrowed funds.
2. Deletion of addition of Rs. 3,63,454/- under Section 14A.

Issue-wise Detailed Analysis:

1. Deletion of disallowance under Section 36(1)(iii) of Rs. 44,22,720/-:

The Revenue challenged the deletion of disallowance under Section 36(1)(iii) related to interest expenses on business advances for purchasing equity shares out of borrowed funds. The Assessing Officer (AO) had concluded that the borrowed funds were utilized for making interest-free advances, thus disallowing the interest expenses. However, the CIT(A) observed that the advances were made between 2005 and 2007 and not in the relevant previous year. The CIT(A) found no exercise by the AO to prove the nexus between the borrowed funds and the interest-free advances. The CIT(A) also noted that the assessee's investment in Globus Industries & Services Ltd. was to increase its stake in a company involved in the same line of business (manufacture and sale of edible oils, Vanaspati, etc.), and there was no finding that Globus Industries & Services Ltd. and the appellant were sister concerns.

The CIT(A) concluded that the disallowance was incorrectly made, as the AO did not establish that the borrowed funds were used for acquiring controlling interest or making investments. The CIT(A) also noted that the related expenditure was not claimed as a deduction, and the court decisions relied upon by the AO were on different issues. Consequently, the CIT(A) deleted the disallowance of Rs. 44,22,720/-, and this deletion was upheld by the Tribunal.

2. Deletion of addition of Rs. 3,63,454/- under Section 14A:

The Revenue also contested the deletion of the addition under Section 14A. The AO had disallowed expenses related to tax-exempt income under Section 14A, applying Rule 8D of the Income Tax Rules, 1962. The CIT(A) noted that the AO did not show any nexus between the expenses and the tax-exempt income. The CIT(A) emphasized that Section 14A aims to disallow only expenses related to tax-exempt income and requires the AO to determine the amount of such expenditure in accordance with the prescribed method, ensuring satisfaction regarding the assessee's claim of expenditure or NIL expenditure.

The CIT(A) referred to several judicial precedents, including decisions from the Delhi High Court, which established that disallowance under Section 14A is not automatic and requires the AO to show a nexus between the tax-exempt income and the related expenditure. The CIT(A) highlighted that the assessee did not claim any exempt income in the computation of income, and therefore, no disallowance could be made under Section 14A. The CIT(A) also noted that the assessee's investment was not fresh but from earlier years.

The Tribunal upheld the CIT(A)'s decision, agreeing that the AO's determination of disallowance under Section 14A was incorrect and lacked an objective analysis of the appellant's expenses. The Tribunal found that the CIT(A) had passed a well-reasoned order, which did not require any interference.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletion of disallowances under Section 36(1)(iii) and Section 14A. The Tribunal found that the CIT(A) had provided detailed and well-reasoned explanations for the deletions, which were supported by judicial precedents and a proper analysis of the facts. The Tribunal emphasized that the AO had not demonstrated the necessary nexus between the borrowed funds and the interest-free advances or between the expenses and the tax-exempt income.

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