2018 (3) TMI 792 - AT - Income Tax

Disallowance of interest expenditure - Held that - Letter filed by the assessee during the course of assessment proceedings before the A.O. clearly shows that it was specifically pointed out by the assessee that the loans in question were given to the various parties out of internal accruals. Balance sheet of the assessee firm as at 31.03.2012 filed along with the return of income makes it abundantly clear that sufficient own funds in the form of partners capital were available with the assessee firm at the relevant time to give the loans in question free of any interest. These facts and figures available before the A.O. were sufficient to show that the interest free loans in question were given in assessee firm out of its own funds and there was no diversion of interest bearing borrowed funds warranting any disallowance out of interest expenditure claimed by the assessee. We, therefore, find no infirmity in the impugned order of the Ld. CIT(A) deleting the disallowance - Decided in favour of assessee Addition u/s 14A on account of interest as per Rule 8D(2)(ii) - Held that - Since the total investment made by the assessee in shares and securities at the relevant time stood at more than 10 crores, it cannot be said that the said investment was entirely made by the assessee from its own funds. The interest bearing borrowed funds thus were utilised by the assessee at least partly for making investments in shares and securities and disallowance on account of interest thus was required to be made under section 14A by applying Rule 8D. However, while computing such disallowance, only net interest expenditure has to be taken into consideration and the investment in shares and securities on which exempt income was actually earned by the assessee during the year under consideration has to be taken into account. We, therefore, set aside the impugned order passed by the Ld. CIT(A) on this issue and restore the matter to the file of the A.O. for computing the disallowance to be made on account of net interest expenditure under section 14A by applying Rule 8D(2)(ii) by taking into account only those investments on which exempt income was actually earned by the assessee during the year under consideration. Ground No. 2 of the revenue s appeal for A.Y. 2012-13 is thus partly allowed. Disallowance u/s 14A r.w. Rule 8D - suo moto disallowance by assessee - CIT-A deleted the addition - Held that - not been able to point out any observation or finding recorded by the A.O. in the assessment order to show his satisfaction, as regards the incorrectness of the disallowance so offered by the assessee u/s 14A having regard to the books of accounts of the assessee. As held inter alia in the case of REI Agro Ltd. (2014 (4) TMI 713 - CALCUTTA HIGH COURT) relied upon by the Ld. CIT(A) in his impugned order, the A.O. cannot made a further disallowance under section 14A without recording a positive satisfaction that the suo moto disallowance made by the assessee is not in order. - Decided against revenue

Summary

Issues Involved:
1. Deletion of addition made by the A.O. on account of disallowance of interest expenditure (A.Y. 2012-13).
2. Restriction of disallowance made by the A.O. under section 14A (A.Y. 2012-13).
3. Deletion of disallowance made by the A.O. under section 14A (A.Y. 2013-14).

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Disallowance of Interest Expenditure (A.Y. 2012-13):
The revenue challenged the deletion by the Ld. CIT(A) of the addition of ?15,13,308/- made by the A.O. on account of disallowance of interest expenditure. The A.O. noted that the assessee had given loans amounting to ?1,26,10,904/- without charging interest and disallowed interest at 12% p.a. on these loans, arguing they were not for business purposes. The Ld. CIT(A) deleted the disallowance, noting that the loans were from earlier periods and had become doubtful of recovery. The assessee had sufficient interest-free funds from partners' capital and interest-free unsecured loans to cover the loans given. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had adequate interest-free funds and there was no diversion of interest-bearing borrowed funds.

2. Restriction of Disallowance under Section 14A (A.Y. 2012-13):
The revenue contested the Ld. CIT(A)'s action in restricting the disallowance of ?67,30,674/- made by the A.O. under section 14A to ?5,03,714/-. The A.O. had made the disallowance on the grounds that interest-bearing borrowed funds were used for investments yielding exempt income. The Ld. CIT(A) found that the assessee had sufficient own funds and interest-free funds to make the investments and that the A.O. had not recorded satisfaction regarding the correctness of the assessee's claim. The Tribunal partially agreed with the revenue, noting that while the assessee had sufficient partners' capital, the total investment exceeded the available interest-free funds. The Tribunal directed the A.O. to recompute the disallowance, considering only net interest expenditure and investments that yielded exempt income during the year.

3. Deletion of Disallowance under Section 14A (A.Y. 2013-14):
The revenue appealed against the deletion by the Ld. CIT(A) of disallowance of ?72,65,727/- made by the A.O. under section 14A. The assessee had earned exempt dividend income and offered a disallowance of ?4,43,517/- under section 14A. The A.O. made a further disallowance without recording satisfaction about the incorrectness of the assessee's claim. The Ld. CIT(A) deleted the additional disallowance, citing the absence of requisite satisfaction by the A.O. The Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court's ruling that the A.O. must record satisfaction before making further disallowance under section 14A.

Conclusion:
The appeal for A.Y. 2012-13 was partly allowed, directing the A.O. to recompute the disallowance under section 14A. The appeal for A.Y. 2013-14 was dismissed, upholding the deletion of disallowance made by the A.O. under section 14A. The judgment highlights the necessity for the A.O. to record satisfaction regarding the correctness of the assessee's claims before making disallowances under section 14A.