2018 (9) TMI 1243 - AT - Income Tax

Disallowance of the amount paid as finance charges when the assessee has provided interest free loans to its subsidiaries - Held that - There was no specific instance noted by the Assessing Officer in respect of any direct nexus between the borrowed fund and the said advances made to the subsidiaries. The Assessing Officer had made general observations without going into the depth of the matter and without pointing out any specific instance where an interest bearing borrowing was advanced to the subsidiaries or establishing that the borrowings made by the appellant were not for business purposes. Both appellate authorities below were of the view that the assessee had explained the sources of the advances and investments made to the subsidiaries, which could not be linked to the borrowed funds and that the advances were made out of the assessee s own capital. At the relevant time the assessee was found to be having an adequate non-interest bearing fund by way of share capital and reserves. See Bharti Televenture Ltd. 2011 (1) TMI 326 - DELHI HIGH COURT . Addition made u/s 14A of the Act r.w.r 8D - Held that - The undisputed fact is that there is no exempt income earned by the assessee during the year under consideration. As in the case of Shivam Motors Pvt. Ltd 2014 (5) TMI 592 - ALLAHABAD HIGH COURT have categorically held that if there is no exempt income earned by the assessee during the year, there cannot be any disallowance u/s 14A r.w.r 8D of the Rules.

Summary

Issues:
1. Disallowance of finance charges on interest-free loans to subsidiaries.
2. Disallowance under section 14A r.w.r 8D of the Act.

Issue 1: Disallowance of finance charges on interest-free loans to subsidiaries:
The Revenue appealed against the deletion of disallowance of finance charges paid on interest-free loans to subsidiaries for A.Ys 2010-11, 2011-12 & 2012-13. The Assessing Officer disallowed amounts totaling &8377; 2.96 crores, &8377; 1.46 crores, and &8377; 56.84 lakhs for the respective assessment years. The CIT(A) found that the interest-free funds available with the assessee exceeded the interest-free loans and advances, directing the deletion of the disallowance. The Revenue contended that there was no commercial expediency in providing interest-free advances, citing legal judgments. However, the Tribunal noted that the Assessing Officer did not base the disallowance on commercial expediency and highlighted the increase in loans without disallowance in the previous year. Relying on precedents, including the Delhi High Court's decision in Modi Rubber, the Tribunal dismissed the Revenue's appeal, emphasizing the absence of a direct nexus between borrowed funds and interest-free advances.

Issue 2: Disallowance under section 14A r.w.r 8D of the Act:
In another appeal, the Revenue challenged the deletion of a disallowance of &8377; 4,82,945 under section 14A r.w.r 8D of the Act. The Assessing Officer computed the disallowance based on a Special Bench decision, despite no exempt income earned by the assessee. The CIT(A) upheld the deletion, noting the absence of exempt income. The Tribunal concurred, citing judicial decisions, including the reversal of the Special Bench decision by the Delhi High Court in Cheminvest Ltd. The Tribunal also referenced judgments from the High Courts of Gujarat and Allahabad, holding that without exempt income, no disallowance under section 14A r.w.r 8D is warranted. Consequently, the Tribunal dismissed the Revenue's appeal on this ground as well.

In conclusion, the Tribunal dismissed all three appeals of the Revenue, emphasizing the absence of commercial expediency in providing interest-free loans and the lack of exempt income for disallowance under section 14A r.w.r 8D. The judgments cited underscored the importance of a direct nexus between funds and advances, as well as the necessity of exempt income for disallowance under section 14A.