2018 (6) TMI 1320 - AT - Income Tax

Disallowance u/s 36(1)(iii) - Held that - CIT(A) has held that out of ₹ 11.14 crores the loan given by the assessee out of overdraft account is only ₹ 2.61 crores which can be considered as sourced out of loan funds available in earlier years. The ld CIT(A) has held that out of ₹ 11.14 cores for advance given by the assessee a sum of ₹ 10.82 crores out of interest free funds. Further it was noted by the ld CIT(A) that in that year only car loans were borrowed by the assessee and those funds were used for buying the cars. In view of this, he stated that on ₹ 10.82 crores there is no interest expenditure attributable hence, he deleted the interest disallowance on the above sum. We do not find any reason to disturb the finding of the ld CIT(A) which is reasonable and logical. - decided against revenue Disallowance u/s 14A - Held that - Substantial force in the argument of the ld AR that if there is no exempt income earned by the assessee then no disallowance can be made u/s 14A of the Act - above facts needs a proper examination that whether assessee has earned exempt income during the year or not. This fact is not available on record we have also verified only the documents available before us in the form of the balance sheet and profit and loss account. The copy of the computation was not placed before us. In view of this, we set aside this ground back to the file of the ld AO for proper verification that whether the assessee has earned any exempt income or not, if he finds that there is no exempt income earned by the assessee, disallowance deserves to be deleted Disallowance of interest on advance - held that - In the present case, the CIT(A) has stated that interest on earlier loan was paid on car loans. However on examination of the balance sheet as at , for 31.03.2009 we find that the assessee has debited the financial expenses of ₹ 7.70 crores and where there was no disallowance was made u/s 36(1)(iii) on account of interest expenditure. Assessment order passed u/s 143(3) of the Act was placed before us, which confirmed above fact - we direct the ld AO to delete the interest expenditure on advance of ₹ 2.61 crores given to M/s. Saurya Promoters Pvt Ltd.

Summary

Issues Involved:
1. Disallowance of interest under section 14A of the Income Tax Act.
2. Disallowance of interest under section 36(1)(iii) of the Act.
3. Disallowance under Rule 8D of section 14A.

Issue 1: Disallowance of Interest under Section 14A:
The assessee and revenue appealed against the order confirming the disallowance of interest under section 14A for the Assessment Year 2010-11. The ld CIT(A) directed the AO to calculate the disallowance of interest based on reduced amounts, which was contested by both parties. The assessee argued for the deletion of disallowance of ?20,16,615, while the revenue challenged the direction of the ld CIT(A) in computing the disallowance. The ld CIT(A) was criticized for enhancing the disallowance under Rule 8D(2)(ii) and (iii) without adequate opportunity of hearing. The Tribunal directed the AO to re-examine the disallowance under section 14A after verifying if the assessee earned any exempt income during the year.

Issue 2: Disallowance of Interest under Section 36(1)(iii) of the Act:
The dispute arose regarding the disallowance of interest under section 36(1)(iii) of the Act, where the ld CIT(A) confirmed the disallowance of ?61,40,312. The assessee contended that the loan advanced to M/s Shourya Promoters (P) Ltd. should not result in the disallowance. The Tribunal upheld the ld CIT(A)'s decision to disallow interest on only ?2.61 crores out of the total loan amount, considering it sourced from interest-free funds. The Tribunal found the ld CIT(A)'s reasoning logical and reasonable, leading to the dismissal of the revenue's appeal.

Issue 3: Disallowance under Rule 8D of Section 14A:
The ld CIT(A) enhanced the disallowance under Rule 8D of section 14A to ?20,16,615 based on the assessee's investments. However, the Tribunal directed the AO to re-evaluate this disallowance after verifying if the assessee earned any exempt income during the year. The Tribunal emphasized that the disallowance should not exceed the exempt income earned by the assessee and instructed the AO to provide a proper opportunity of hearing to the assessee before making a decision.

In conclusion, the Tribunal partially allowed the appeal of the assessee and dismissed the appeal of the revenue, emphasizing the importance of proper verification and adherence to legal provisions in determining disallowances related to interest and investments under the Income Tax Act.