2017 (11) TMI 1306 - AT - Income Tax

Disallowance of interest paid on the funds which were advanced interest free - Held that - It is an undisputed fact that the assessee had interest free funds available with it at the time when advances were given which ranged between ₹ 38.60 crores to ₹ 39.21 crores right from assessment year 2009-10 to 2011-12. On the other hand, amount advanced to the related parties/sister concerns was only ₹ 8.24 crores which far exceeded the interest free funds available with the assessee, as has been incorporated in the foregoing paragraphs. Once that is so, then the ratio laid down by the Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT), as relied upon by the ld. Counsel for the assessee before us, gets squarely applicable. Accordingly, the order of the ld. CIT (A) in deleting the disallowance of interest is upheld - Decided in favour of assessee. Disallowance u/s 14A r.w.r. 8D - Held that - From the perusal of the nature of expenditure and also total expenditure debited under the head administrative expenses , we find that first of all, total expenditure debited itself is ₹ 13 lakhs which also contains major expenditure on account of legal and professional expenses which has nothing to do with earning of dividend income. Similarly, registration & filing fees, etc. also cannot be said to be linked with earning of exempt income. Thus, having regard to the nature of accounts and expenditure debited, the amount disallowed by the assessee at ₹ 2,33,444/- is quite reasonable and fair and the Assessing Officer without finding any defect, either in the nature of account or in the claim of the assessee, has erroneously proceeded to arbitrarily compute the disallowance under rule 8D(2)(iii), especially when disallowance has been worked out far excess than the total expenditure debited. Accordingly, the order of the ld. CIT(A) deleting the said disallowance is upheld and the Revenue s appeal is dismissed.- Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of disallowance of ?31,57,440/- on account of interest paid on funds advanced interest-free.
2. Deletion of disallowance of ?20,04,859/- made under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of ?31,57,440/- on Account of Interest Paid on Funds Advanced Interest-Free:

The assessee company, engaged in dealing in shares and advancing loans, had advanced interest-free loans to related concerns while incurring interest expenses on borrowed funds. The Assessing Officer (AO) disallowed ?31,57,440/- of interest expenses, arguing that the assessee borrowed funds on which it paid interest but simultaneously gave interest-free loans to sister concerns. The AO contended that the assessee failed to establish a business purpose for these advances.

Before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee argued that the advances were made from its own funds and not from interest-bearing borrowings. The assessee provided a detailed chart showing the sources of funds, demonstrating that the funds used for the advances were from non-interest-bearing sources. The CIT(A) found that the assessee had sufficient interest-free funds exceeding the amount advanced and concluded that no interest-bearing borrowings were used for these advances. The CIT(A) relied on the judgment of the Bombay High Court in CIT vs. Reliance Utilities and Power Ltd., which held that if both interest-free and borrowed funds are available, it should be presumed that investments are made from interest-free funds.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee had interest-free funds ranging from ?38.60 crores to ?39.21 crores, far exceeding the ?8.24 crores advanced. Thus, the disallowance of interest was deleted, and the Revenue's appeal on this ground was dismissed.

2. Deletion of Disallowance of ?20,04,859/- under Section 14A read with Rule 8D:

The AO disallowed ?20,04,859/- under Section 14A, stating that the assessee's calculation of disallowance was incorrect. The assessee had shown tax-free dividend income and claimed interest expenses. The assessee made a suo-moto disallowance of ?1,06,63,031/- but the AO computed the disallowance at ?1,26,67,890/-, including disallowance of interest and indirect expenditure, leading to an additional disallowance of ?20,04,859/-.

Before the CIT(A), the assessee argued that the total administrative expenses debited were ?13 lakhs, and the disallowance made was reasonable. The CIT(A) found that the AO's disallowance was arbitrary and not supported by the nature of the expenses. The CIT(A) deleted the additional disallowance, stating that the assessee's calculation was fair and reasonable.

The Tribunal upheld the CIT(A)'s decision, noting that the total administrative expenses were ?13 lakhs, and the nature of the expenses did not justify the AO's higher disallowance. The Tribunal found the assessee's disallowance of ?2,33,444/- reasonable and dismissed the Revenue's appeal on this ground.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletion of disallowances on both issues. The order was pronounced in the open court on 14th September 2017.