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2019 (4) TMI 670 - AT - Income TaxDisallowance of expenditure u/s 14A, 36(1)(iii) and 37(1) - Commercial expediency and corporate strategy for advancing interest bearing funds as interest free advances to subsidiary companies - HELD THAT - In the instant case, there is no dispute that there is no dividend income earned during the impugned assessment year. Therefore, there is no case for disallowing the expenditure relatable to dividend income. This view is also supported by the decision of this Tribunal in the assessee s own case for the A.Y. 2013-14 2018 (5) TMI 1256 - ITAT VISAKHAPATNAM also. Therefore, respectfully following the view taken by this Tribunal in the case cited we hold that there is no case for disallowing the expenditure relatable to exempt income without having derived exempt income. Accordingly, the expenditure relatable to dividend income withdrawn by the assessee required to be upheld. Hence, we set aside the orders of the lower authorities and allow the appeal of the assessee on this issue. Perusal of the Balance Sheet shows that the assessee has shareholder s funds of ₹ 2478.45 crores and the investment made in mutual funds is a paltry sum of ₹ 1.89 crores. Therefore, we hold that the assessee is having sufficient interest free funds to the make the investment in mutual funds, hence, we do not see any reason to sustain the disallowance u/s 37(1). Accordingly, we set aside the orders of the lower authorities on this issue and delete the addition made by the AO In the instant case, the assessee has demonstrated the commercial expediency and corporate strategy for advancing interest bearing funds as interest free advances to subsidiary companies. The subsidiaries are 100% owned by the assessee company and step down subsidiaries are owned by the subsidiaries, therefore, the interest on borrowed capital required to be allowed as deduction and there is no case for disallowance. Accordingly, we hold that in the instant case there is no case for disallowance of interest u/s 36(1)(iii). Interest free advances given to the assessee to its subsidiary are part of corporate strategy with a business prudence and interest free funds available to the assessee are more than the advances given to the subsidiary company. Therefore, we hold that no disallowance is required u/s 36(1)(iii) of the Act. Accordingly, we hold that the disallowance made by the AO in respect of expenditure relatable to exempt income u/s 14A, disallowance of capital expenditure u/s 37(1) and disallowance of interest expenditure u/s 36(1)(iii) are unsustainable, accordingly deleted. The orders of the lower authorities in respect of ground allowed in favour of assessee Addition of legal expenses - HELD THAT - From the agreement, it is found that the service provider is providing services to the assessee company for supply of manpower and expertise wherever and and whenever needed on ongoing basis. The assessee has made the payment through cheque and the service tax was paid and the TDS was also deducted for the services rendered by the service provider. The department has not brought on record any evidence to show that the agreement is bogus. Hence, there is no reason to suspect the payment or nature of services rendered. Therefore, there is no case to sustain the addition made by the AO. Accordingly the addition made by the AO is deleted and the appeal of the assessee on this ground is allowed. Disallowance of sponsorship expenses - HELD THAT - As decided in assesee s own case 2018 (5) TMI 1256 - ITAT VISAKHAPATNAM expenditure incurred for sponsorship is business expenditure Addition for corporate guarantee commission - assesse charged the guarantee commission from AE @ 0.90% and the TPO proposed for @ 1.30% - HELD THAT - following the view taken by this Tribunal in the assessee s own case 2018 (5) TMI 1256 - ITAT VISAKHAPATNAM , we hold that Corporate Guarantee commission charged by the [email protected]% is reasonable. Accordingly, we set aside the orders of the lower authorities and delete the addition made by the AO. Folio maintenance charges and provision for leave encashment - made addition in the final assessment order without being brought on Draft assessment order - HELD THAT - From plain reading of section, it is observed that the AO is not permitted to make any addition which is not contained in the draft assessment order and approved by the DRP. In the instant case, the additions made by the AO in the final assessment in respect of folio maintenance and provision for leave encashment does not contain in the draft assessment order and without the approval of DRP. Therefore, we hold that the additions made in the final assessment with regard to folio maintenance and leave encashment are unsustainable, accordingly deleted. Levying of interest u/s 234A - HELD THAT - In the instant case, the assessee filed the return of income on 28.11.2014 against the due date of 30.11.2014. Subsequently, the assessee filed the revised return of income on 16.02.2016 within the time limit allowed u/s 139(5). In the earlier paragraphs, we have held that the revised return was filed due to mistake of omission and the same was held to be valid. Since we held that the return of income filed u/s 139(5) is valid, there is no case for levying of interest u/s 234A. Accordingly, the interest charged u/s 234 A is cancelled and the appeal of the assessee is allowed.
Issues Involved:
1. Disallowance of expenditure under sections 14A, 36(1)(iii), and 37(1) of the Income Tax Act. 2. Validity of the revised return of income. 3. Disallowance of legal and professional expenses. 4. Disallowance of sponsorship expenses. 5. Adjustment of corporate guarantee commission. 6. Addition of folio maintenance charges and provision for leave encashment. 7. Levy of interest under section 234A. 8. Levy of interest under section 234B. Issue-wise Detailed Analysis: 1. Disallowance of Expenditure under Sections 14A, 36(1)(iii), and 37(1): Section 14A: The assessee initially disallowed ?57.75 crores in its original return but later filed a revised return reducing the disallowance to ?2.80 lakhs, claiming no exempt income was earned. The AO rejected the revised return, stating it was not due to any omission or wrong statement, and disallowed the entire interest and processing charges of ?57.72 crores. Section 36(1)(iii): The AO disallowed interest expenses, arguing the funds borrowed were not used for business purposes but extended as interest-free loans to subsidiaries, which were not earning revenue. The DRP upheld this disallowance, relying on the ITAT Hyderabad decision in GVK Airport Developers Ltd. Section 37(1): The AO disallowed expenses related to mutual fund investments, treating them as capital expenditure. The DRP upheld this disallowance due to the lack of evidence showing the investments were made from reserve funds. 2. Validity of the Revised Return of Income: The assessee argued that the revised return was filed within the time limit under section 139(5) due to the discovery of an error in the original return. The Tribunal held that the revised return was valid as it was filed within the permissible time and due to an erroneous disallowance of expenditure relating to exempt income. 3. Disallowance of Legal and Professional Expenses: The AO disallowed ?20.83 lakhs paid to GVK Technical and Consultancy Pvt. Ltd. for retainer ship fees, which the DRP upheld. The Tribunal found the agreement for services genuine, with payments made through cheque, service tax paid, and TDS deducted, thus deleting the disallowance. 4. Disallowance of Sponsorship Expenses: The AO disallowed ?4.92 lakhs paid as sponsorship fees, which the DRP upheld. The Tribunal, referring to its decision in the assessee’s own case for A.Y. 2013-14, held that such expenses are business expenditures and deleted the disallowance. 5. Adjustment of Corporate Guarantee Commission: The TPO proposed an adjustment of ?23.27 crores, suggesting a commission rate of 1.60% instead of the 0.90% charged by the assessee. The Tribunal, following its decision in the assessee’s own case for A.Y. 2013-14, held that a 0.90% commission was reasonable and deleted the addition. 6. Addition of Folio Maintenance Charges and Provision for Leave Encashment: The AO made these additions in the final assessment order without including them in the draft assessment order. The Tribunal held that such additions were unauthorized as they were not proposed in the draft assessment order and deleted them. 7. Levy of Interest under Section 234A: The Tribunal held that since the revised return was filed within the permissible time under section 139(5) and was valid, there was no case for levying interest under section 234A, and thus, the interest charged was canceled. 8. Levy of Interest under Section 234B: The Tribunal noted that the interest under section 234B is consequential in nature and upheld it accordingly. Conclusion: The Tribunal allowed the appeal of the assessee, deleting the disallowances and additions made by the AO and DRP, and held the revised return as valid. The interest under section 234A was canceled, while the interest under section 234B was upheld as consequential.
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