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2018 (12) TMI 902 - AT - Income TaxDisallowance u/s 36(l)(iii) - assessee has given interest free advances to its sister concern which is for non business purposes - proof of Commercial expediency - Held that - Commercial expediency of the said advance had been adequately established by the assessee. The facts relating to the impugned transaction have not been controverted by the Revenue. That Shivaks Impex Ltd. was a step down subsidiary of the assessee company, has not been disputed by the Revenue. The fact that the assessee, its subsidiary and Shivaks Impex Ltd. were all in the same line of business has also not been disputed by the Revenue. It is also not disputed that the advance made has been utilized for the purpose of making purchases. It is evident that had the said advance not been made it would have seriously affected the business of Shivaks Impex Ltd., which in turn would have affected the assessee also since the value of its investment in its subsidiary would have been affected on account of the poor results shown by Shivaks Impex Ltd. - no disallowance u/s 36(1)(iii) could have been made on account of the availability of sufficient own funds and on account of the advances having been made for business purpose ,no disallowance of interest pertaining to funds utilized for making the same was warranted - decided in favour of assessee. Disallowance u/s 14A - CIT(A) deleted the disallowance made on finding that no exempt income had been earned by the assessee from the impugned investments made - Held that - Rule 8D cannot be read in a manner, which takes it beyond the scope and content of the main provision, which is, Section 14 A of the Act. The is clearly relatable to the earning of actual income and not notional or anticipated income. The submission of the Department to the effect that s.14A would be attracted even to exempt income includable in total income would entail the assessment of notional income, assumed to be exempt in the future, in the present assessment year. The computation of total income in terms of s.5 of the Act is on real income and there is no sanction in law for the assessment of admittedly notional income, particularly in the context of effecting a disallowance in connection therewith. - decided in favour of assessee.
Issues Involved:
1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act. 2. Disallowance of expenses under Section 14A of the Income Tax Act. Issue-wise Detailed Analysis: 1. Disallowance of Interest under Section 36(1)(iii): The Revenue challenged the deletion of a disallowance of ?18,44,482/- by the CIT(A), arguing that the assessee had given interest-free advances of ?3,55,00,000/- to a sister concern, Shivaks Impex Ltd., for non-business purposes. The Assessing Officer (AO) noted that the assessee had paid interest on loans raised from banks but did not charge any interest on the advances to Shivaks Impex Ltd. The AO disallowed the interest expense under Section 36(1)(iii) of the Income Tax Act, citing the failure to prove business exigency and relying on the decisions in Abhishek Industries Ltd. and S.A. Builders. On appeal, the CIT(A) deleted the disallowance, finding that the assessee had sufficient own funds to make the advances, citing decisions from the Hon'ble Jurisdictional High Court and ITAT Chandigarh Bench. The CIT(A) noted that the assessee's share capital, free reserves, and interest-free current liabilities far exceeded the advances given, thus demonstrating the availability of surplus funds. The Revenue contended that the presumption theory upheld by the Jurisdictional High Court was overruled by the Apex Court in Maxopp Investment Ltd. Vs. CIT, which affirmed the principle of apportionment in cases of mixed funds. However, the assessee argued that the decision in Avon Cycles Ltd. was fact-specific and did not address the presumption theory where sufficient own funds were available. The Tribunal agreed with the assessee, stating that the presumption theory still holds, as upheld in Hero Cycles Pvt. Ltd. Vs. CIT, where the Apex Court recognized that sufficient own funds negate the need for disallowance under Section 36(1)(iii). The Tribunal held that the CIT(A)'s decision was correct, given the sufficient own funds and the business purpose of the advances, and dismissed the Revenue's appeal. 2. Disallowance of Expenses under Section 14A: The Revenue contested the deletion of a disallowance of ?25,43,299/- under Section 14A, arguing that the assessee had made significant investments and claimed interest expenses on outstanding loans. The AO made the disallowance based on the investments in shares of a sister concern, M/s. KVS International Pvt. Ltd., relying on various judgments. The CIT(A) deleted the disallowance, finding that no exempt income was earned by the assessee from the investments during the year, relying on the Jurisdictional High Court's decision in CIT vs. M/s Lakhani Marketing Inc. and ITAT Chandigarh's decision in Swami Automobiles (P) Ltd. The Tribunal upheld the CIT(A)'s decision, noting that the Revenue failed to controvert the factual and legal findings. The Tribunal referenced the Apex Court's decision in Commissioner of Income Tax vs. Chettinad Logistics (P) Ltd., which held that no disallowance under Section 14A is warranted if no exempt income is earned. The Tribunal dismissed the Revenue's appeal on this ground as well. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletion of disallowances under Sections 36(1)(iii) and 14A, based on the sufficiency of own funds and the absence of exempt income, respectively.
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