2018 (10) TMI 789 - AT - Income Tax

Disallowance u/s 14A - Held that - Expenses of ₹ 6, 000/- towards audit fee and expenditure by way of Professional Fee of ₹ 2100/- claimed as deduction u/s 37(1) which was claimed as deduction from income from commission and brokerage. We fail to understand that when only the assessee has effectively claimed deduction of expenses to the tune of ₹ 8, 100/- from its income as detailed above, how disallowance u/s 14A r.w.r. 8D(2)(iii) can be worked out to be ₹ 1, 50, 230/- . Keeping in view smallness of the expenses claimed vis-a-vis scale of operations of the assessee, we are accepting the claim of the assessee for deduction of aforesaid expenses as business expenses to the tune of ₹ 8, 100/- from income from commission and brokerage and direct that under these factual circumstances of the case based on material on record, no disallowance u/s 14A read with Rule 8D(2)(iii) of the 1962 Rules is warranted and we order for deletion of the disallowance of ₹ 1, 50, 230/- made by the AO u/s 14A read with Rule 8D(2)(iii) of the 1962 Rules which was later confirmed by learned CIT(A). Computation of income - assessee has adjusted interest on loan taken from LIC towards interest income received on capital with the partnership firm and net loss is shown under the head income from partnership firms - admission of additional ground - Held that - The assessee did not raise this ground specifically in an appeal filed before the learned CIT(A) but raised this issue in written pleadings/submissions dated 06-06-2016 (placed in file) filed before learned CIT(A). The assessment order framed by the AO although dedicated para number 5 discussing this issue but separate additions were not made in the assessment order in computation of income but rather interest income of ₹ 59, 60, 000/- was reduced to NIL after allowing adjustment of ₹ 59, 60, 000/- towards interest expenditure as against claim of deduction of ₹ 62, 46, 604/- made by the assessee. Thereafter again a disallowance is separately made on account of interest payment made on borrowings which were purported to be utilised for granting interest free loans and advances to relatives and sister concerns. The manner in which computation of income is drawn by the AO in pursuance to assessment framed is definitely not free from state of confusion. This could possibly be the reason for the assessee not raising the specific grounds of appeal before learned CIT(A) in first appeal. The assessee is also contending the same before learned CIT(A) in its rectification application dated 12-09-2016 that the manner in which assessment is framed reflects confused state of mind of the AO. The assessee in our considered view is entitled to benefit of doubt which was created in the manner the computation of income was drawn by the AO in consequence of assessment framed. We direct admission of the grounds of appeal raised by the assessee with respect to disallowance of interest expenditure on LIC loans raised by it. Addition u/s 36(1)(iii) - Diversion of funds by way of loans and advances (interest free) to his relative and sister concerns - Held that - The assessee has its own interest free capital of ₹ 11.40 crores and a claim is made that the assessee also has interest free borrowed funds to the tune of ₹ 1.21 crores. The claim is not controverted by Revenue even before the tribunal. There is no nexus of diversion of interest bearing borrowed funds for advancing interest free loans and advances to sister concerns and relatives are brought on record by Revenue. We are of the considered view that the presumption will apply that the assessee utilised its own interest free funds for the purposes of advancing interest free loans and advances to sister concerns and relatives and the decision of Reliance Utilities and Power Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT)and HDFC Bank Limited v. DCIT 2016 (3) TMI 755 - BOMBAY HIGH COURT - Addition to be deleted - Decided in favour of assessee.

Issues Involved:
1. Disallowance of expenses under Section 14A.
2. Allowability of interest paid on LIC loans.
3. Diversion of funds by way of interest-free loans and advances to relatives and sister concerns.

Detailed Analysis:

First Issue: Disallowance of Expenses under Section 14A

The assessee, engaged in trading Futures & Options and commission agents, received dividend income of ?2,07,884/- claimed as exempt. The AO disallowed ?1,50,230/- under Section 14A read with Rule 8D(2)(iii) of the Income-tax Rules, 1962, attributing it to the average investments in shares. The CIT(A) upheld this disallowance, stating the business was composite and indivisible, thus necessitating the disallowance as per Rule 8D. The Tribunal, however, observed that the assessee's own capital was ?11.40 crores, and the claimed expenses were minimal compared to the scale of operations. Consequently, the Tribunal directed the deletion of the disallowance of ?1,50,230/- under Section 14A, accepting the assessee's claim of ?8,100/- as business expenses.

Second Issue: Allowability of Interest Paid on LIC Loans

The AO disallowed the adjustment of interest paid on LIC loans against interest income from the partnership firm, M/s Ritesh Exports. The CIT(A) did not address this issue in its order, leading the assessee to file a rectification application, which was dismissed. The Tribunal noted the confusion in the AO's computation of income and admitted the grounds of appeal regarding the disallowance of interest expenditure on LIC loans. The Tribunal remitted the matter to the AO for verification of the direct nexus between the LIC loans and the investment in the partnership firm, directing a fresh determination of the issue.

Third Issue: Diversion of Funds by Way of Interest-Free Loans and Advances

The AO observed that the assessee advanced ?46.91 lacs as interest-free loans to relatives and sister concerns while paying interest on borrowed funds. The AO disallowed ?4,22,202/- under Section 36(1)(iii), which was upheld by the CIT(A). The Tribunal, however, noted that the assessee had sufficient own funds of ?11.40 crores and interest-free borrowings of ?1.21 crores. Citing the presumption that the assessee used its own funds for interest-free advances, the Tribunal referred to the decisions in Reliance Utilities and Power Ltd. and HDFC Bank Limited, concluding that the disallowance was unsustainable and ordered its deletion.

Conclusion:

The Tribunal allowed the appeal, directing the deletion of the disallowance under Section 14A and the disallowance of interest expenditure under Section 36(1)(iii). The issue of interest paid on LIC loans was remitted to the AO for fresh verification and determination. The order was pronounced in the open court on 05.10.2018.

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