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2019 (2) TMI 1144 - HC - Income TaxRevision u/s 263 - dis-allowance of interest on borrowed funds - AO disallowed only a small portion of the interest claimed as expenditure - Commissioner sought to invoke Section 14A to disallow proportionate interest in the borrowed funds of the assessee, by an order under Section 263 - HELD THAT - Whether there should have been an examination on facts, going by the dictum of M/s.S.A.Builders Ltd. 2006 (12) TMI 82 - SUPREME COURT as to whether there was a commercial expediency insofar as the interest free advances made to the subsidiary company and whether Section 14A could have been applied. We find that the order under Section 263 was passed specifically based on Section 14A. As far as the applicability of Section 14A is concerned, Commissioner of Income Tax v. M/s.Essar Teleholdings Ltd. 2018 (2) TMI 115 - SUPREME COURT OF INDIA held that the machinery provisions having come only from the assessment year 2007-08, the application of Section 14A would be prospective to that. In such circumstances, we reject the appeals and uphold the orders of the Tribunal in both the appeals.
Issues: Disallowance of expenditure under Section 263 of the Income Tax Act, 1961; Disallowance of interest on borrowed funds; Applicability of Section 14A regarding interest disallowance; Examination of commercial expediency in interest-free advances to subsidiary company.
The judgment by the Kerala High Court involved two connected appeals challenging the disallowance of expenditure under Section 263 of the Income Tax Act, 1961, and the consequential order. The primary issue revolved around the disallowance of interest on borrowed funds by the assessee, who had also advanced interest-free amounts to a subsidiary company. The Assessing Officer had disallowed a small portion of the interest claimed as expenditure, while the Commissioner sought to invoke Section 14A to disallow proportionate interest on borrowed funds. The Tribunal intervened based on the Supreme Court's decision in M/s.S.A.Builders Ltd. v. Commissioner of Income Tax (2007) 288 ITR 1, which led to the appeal. The crux of the matter lay in two questions: whether a factual examination was necessary regarding the commercial expediency of interest-free advances to the subsidiary company, and the applicability of Section 14A. The order under Section 263 was specifically based on Section 14A, but the Supreme Court's ruling in Commissioner of Income Tax v. M/s.Essar Teleholdings Ltd. (2018) 401 ITR 445 clarified that the application of Section 14A would be prospective from the assessment year 2007-08. Consequently, the High Court rejected the appeals and upheld the Tribunal's orders in both cases, emphasizing that no costs were to be incurred in the process.
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