2018 (10) TMI 796 - AT - Income Tax

Disallowance of provision for leave encashment - Held that - There is no bifurcation of the closing balance in the leave wage account. Unless yearwise bifurcation is furnished by the assesseee , it is not possible to disallow the exact amount of provisions for leave wages relating to the assessment year under consideration. The Assessing Officer has to disallow the provisions of leave encashment relating to the assessment year under consideration which shall be reduced by payment made after 31/03/2008 but before filing the return of income. Hence, the issue in dispute is remitted back to the file of the Assessing Officer with a direction to the assessee to furnish the exact amount of provisions towards leave wages relating to the assessment year under consideration. Disallowance on account of interest charged on the advances given to sister concern for non-business purposes - Held that - The main plea of the Ld. AR is that the amount was advanced to sister concerns in view of the business transactions between the assessee and the sister concerns and it cannot be considered that the assessee had advanced loans to the sister concerns free of interest. In our opinion, the assessee has to establish the commercial expediency to advance money to the sister concerns and the assessee has to furnish details of the business transactions between the assessee and the sister concerns. This exercise has not been done. With this observation, we remit this issue to the file of the Assessing Officer for fresh consideration in accordance with law after giving reasonable opportunity of hearing to the assessee. This ground of appeal of the assessee is allowed for statistical purposes. Disallowance on account of interest on borrowed capital for capital work in progress - main plea of the assessee is that the assessee is having interest free funds to make investment in capital work in progress and the assessee has not put to use any borrowed funds for making the investment in capital work in progress - Held that - The assessee has not established the availability of interest free funds for making investment in capital work in progress. The assessee has to prove the availability of interest free funds on the day of investment in capital work in progress and the funds have to be available with the assessee at the time of making investment and not at the end of the year. Accordingly, we direct the assessee to establish the availability of interest free funds at the time of making investment in capital work in progress. Hence, with this direction, we remit this issue to the file of the Assessing Officer for fresh consideration. Disallowance u/s. 14A - Held that - As in the case of CIT vs. Catholic Syrian Bank Ltd. & Others (2010 (10) TMI 1068 - KERALA HIGH COURT) has held that disallowance u/s. 14A is to be made despite the fact that the assessees have not maintained separate accounts for the expenditure incurred towards interest paid on funds borrowed for investment in such securities and shares as well as overheads and administrative expenses. However, we make it clear that Rule 8D(iii) is applicable though, the assessee used its own funds in investment which yielded exempted income. This is so, because there was common administrative expenses incurred by the assessee. We also make it clear that if there is no exempt income, then there cannot be any disallowance u/s. 14A r.w. Rule 8D as held by the Supreme Court in the case of Maxopp Investment Ltd. vs. CIT 2018 (3) TMI 805 - SUPREME COURT OF INDIA . This ground of appeal of the assessee is partly allowed for statistical purposes.

Issues Involved:
1. Disallowance of provision for leave encashment.
2. Disallowance of interest on advances to sister concerns for non-business purposes.
3. Disallowance of interest on borrowed capital for capital work in progress.
4. Disallowance under section 14A for investments yielding exempt income.

Issue-wise Detailed Analysis:

1. Disallowance of Provision for Leave Encashment:
The first issue concerns the disallowance of ?13,96,349/- as provision for leave encashment. The Assessing Officer (AO) added ?26,00,762/- to the total income based on the Audit Report, which stated that leave wages of ?29,59,030/- were not paid during the year. The assessee had disallowed only ?3,58,268/-. On appeal, the CIT(A) allowed a deduction of ?15,62,681/- and confirmed the balance disallowance. The assessee argued that the actual payment of ?26,19,379/- was debited to the profit and loss account, and the increase in liability for leave wages of ?3,58,268/- was already disallowed. The Tribunal noted that the closing balance included previous years’ provisions and remitted the issue back to the AO to determine the exact provisions for the assessment year under consideration.

2. Disallowance of Interest on Advances to Sister Concerns:
The second issue involves the disallowance of ?7,07,014/- as interest on advances given to sister concerns. The AO disallowed this amount, asserting that the advances were for non-business purposes. The CIT(A) upheld this disallowance, citing that the assessee failed to prove the nexus between borrowed funds and the advances. The assessee argued that the advances were made for commercial expediency, relying on the Supreme Court judgment in S.A. Builders vs. CIT. The Tribunal remitted the issue back to the AO to verify the commercial expediency and the details of business transactions between the assessee and sister concerns.

3. Disallowance of Interest on Borrowed Capital for Capital Work in Progress:
The third issue pertains to the disallowance of ?42,03,465/- as interest on borrowed capital for capital work in progress. The AO capitalized this interest as the assets were not put to use during the year. The CIT(A) confirmed this disallowance. The assessee contended that it had sufficient internal surplus to finance the capital work in progress and that the provisions of section 36(1)(iii) did not apply as there was no business expansion. The Tribunal directed the assessee to establish the availability of interest-free funds at the time of investment and remitted the issue back to the AO for fresh consideration.

4. Disallowance under Section 14A:
The fourth issue involves the disallowance of ?1,34,625/- under section 14A for investments yielding exempt income. The AO made this disallowance despite the assessee not earning any exempt income. The CIT(A) confirmed the addition, stating that the assessee failed to establish the source of funds used for investments. The assessee argued that it had sufficient own funds and that interest on borrowings used for business purposes should not be considered for disallowance. The Tribunal remitted the issue back to the AO for fresh consideration, directing the assessee to furnish evidence of own funds and business use of borrowings. The Tribunal also noted that if there is no exempt income, no disallowance under section 14A r.w. Rule 8D should be made.

Conclusion:
The appeals were partly allowed for statistical purposes, with multiple issues remitted back to the AO for fresh consideration based on detailed verification and evidence to be provided by the assessee. The order was pronounced in open court on October 10, 2018.

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