2018 (6) TMI 1112 - AT - Income Tax

Disallowance u/s. 36(1)(iii) - addition of interest on the diversion of the fund - Held that - The owned funds of the assessee exceed the amount of money advanced to its sister concern. Therefore, the presumption can be drawn that the money has been advanced out of its owned fund - As the owned fund of the assessee exceeds the amount of advances given to its sister concern, we hold that the advances have been made out of the owned funds of the assessee, and therefore there is no question of making any disallowance on account of diversion of fund u/s 36(1)(iii) of the Act. Hence, we do not find any reason to interfere in the order of learned CIT(A). Addition under the provision of Section 14A - Held that - It is an undisputed fact that the assessee has not earned any dividend income / exempt income from the shares held as an investment. Therefore, in our considered view, no disallowance u/s 14A r.w.r. 8D can be made. In this regard, we find support and guidance from the judgment of Hon ble Gujarat High Court in the case of CIT vs. Corrtech Energy P. Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT - Decided against revenue Addition made on account of capitalization of interest expenses - Held that - As the owned fund of the assessee exceeds the amount of capital work in progress, we hold that it has been made out of the owned funds of the assessee and therefore there is no question of making any disallowance on account of money invested in the capital work in progress. Hence, we do not find any reason to interfere in the order of learned CIT(A). - Decided against revenue

Summary

Issues Involved:
1. Deletion of addition on account of disallowance under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Deletion of addition on account of disallowance under Section 14A of the Income Tax Act, 1961.
3. Deletion of addition on account of capitalization of interest expenses.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Disallowance under Section 36(1)(iii):
The Revenue contested the deletion of ?44,44,962/- by the CIT(A) concerning the disallowance of interest on funds allegedly diverted to sister concerns. The assessee, a limited company engaged in manufacturing and trading, had advanced funds to its sister concerns without charging interest, despite incurring interest costs on borrowed funds. The AO disallowed the interest proportionately and added it back to the assessee's income. However, the CIT(A) deleted the addition, noting that the advances were part of regular business transactions and were covered by the assessee's own funds and interest-free loans, thus not justifying the disallowance. The Tribunal upheld the CIT(A)'s decision, citing the Bombay High Court judgment in CIT vs. Reliance Utilities & Power Ltd., which supports the presumption that investments are made from interest-free funds if such funds are available.

2. Deletion of Addition on Account of Disallowance under Section 14A:
The AO made a disallowance of ?17,760/- under Section 14A, assuming that borrowed funds were used for investments generating tax-free income. The assessee argued that no tax-free income was earned during the year, making the disallowance unjustified. The CIT(A) agreed and deleted the addition, a decision the Tribunal upheld. The Tribunal referenced the Gujarat High Court's ruling in CIT vs. Corrtech Energy P. Ltd., which states that Section 14A disallowance is not applicable if no exempt income is earned.

3. Deletion of Addition on Account of Capitalization of Interest Expenses:
The AO disallowed ?23,508/- for interest expenses, assuming borrowed funds were used for capital work-in-progress. The assessee contended that its own funds exceeded the capital work-in-progress amount, implying no borrowed funds were used. The CIT(A) deleted the addition, noting the AO's failure to correlate borrowed funds with the capital work-in-progress. The Tribunal upheld this decision, again referring to the Bombay High Court's judgment in CIT vs. Reliance Utilities & Power Ltd., supporting the presumption that investments are made from interest-free funds if available.

General Grounds:
Grounds 4 and 5 were deemed general and did not require separate adjudication.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletions of the additions made by the AO. This order was pronounced in open court on 20/06/2018.