2019 (6) TMI 146 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - difference in rate of interest between the borrowals made by the assessee from bank and interest charged on loans advanced to subsidiary - HELD THAT - It is not disputed that Patel Engineering Ltd. and Patel Realty Ltd. are wholly owned subsidiaries of the assessee. Therefore, the assessee has a stake in the performance and profit making of these companies. That being the case, it cannot be denied that the advancement of loan to the aforesaid subsidiaries is in connection with assessee s business. Moreover, it is not a case where the assessee has advanced loans to subsidiaries without charging any interest. In fact, the assessee has charged interest @ 12% on the loans advanced to the subsidiaries. Therefore, the difference in the interest rate between the borrowed funds and loans advanced is only 3.25%. In any case of the matter, since the assessee had advanced the loan in connection with its business, no disallowance u/s 36(1)(iii) could be made as per the ratio laid down in the decisions cited by the learned Authorised Representative. - Ground raised is allowed. Disallowance u/s 14A r/w rule 8D - HELD THAT - There is no dispute that in the previous year relevant to the assessment year under dispute, the assessee had earned exempt income by way of dividend amounting to ₹ 3,663 only. Whereas, the AO computed disallowance under rule 8D(2) r/w section 14A. As per the settled legal principle, disallowance of expenditure attributable to earning of exempt income in terms of section 14A cannot exceed the exempt income earned during the year. In this context, we refer to the decision cited by the AR. That being the case, the order passed by the learned Commissioner (Appeals) on the issue deserves to be upheld. Grounds are dismissed.

Summary

Issues:
1. Disallowance of interest expenditure under section 36(1)(iii) of the Act.
2. Deletion of disallowance made under section 14A r/w rule 8D by the Assessing Officer.

Issue 1: Disallowance of Interest Expenditure
The appeal arose from an order by the Commissioner of Income Tax (Appeals) for the assessment year 2014-15. The Assessing Officer disallowed interest expenditure of ?88.20 lakh under section 36(1)(iii) of the Act due to a difference in interest rates on borrowed funds and loans advanced by the assessee. The assessee firm had borrowed money at 15.25% interest but lent funds to a sister concern at 10.84% interest, later converted to preferential shares. The first appellate authority confirmed the disallowance. The assessee contended that as a promoter of the borrower, the loan was in connection with business, and interest was charged on loans to subsidiaries. The Tribunal noted that the difference in interest rates was 3.25% and allowed the appeal, stating that since the loan was connected to business, no disallowance should be made under section 36(1)(iii).

Issue 2: Deletion of Disallowance under Section 14A r/w Rule 8D
The Revenue's appeal concerned the deletion of a disallowance made under section 14A r/w rule 8D by the Assessing Officer. The assessee had made investments in shares capable of yielding exempt income. The Assessing Officer computed a disallowance of ?1,97,89,061 under rule 8D(2), but the Commissioner (Appeals) restricted it to the exempt income earned during the year, amounting to ?3,663, deleting the balance. The Departmental Representative argued that the disallowance should not be restricted, citing a Supreme Court decision. The Tribunal upheld the Commissioner (Appeals)'s decision, noting that the disallowance of expenditure attributable to earning exempt income cannot exceed the exempt income earned during the year, as per legal principles. The appeal was dismissed, affirming the deletion of the disallowance.

In conclusion, the Tribunal partly allowed the assessee's appeal regarding interest expenditure disallowance and dismissed the Revenue's appeal on the disallowance under section 14A r/w rule 8D. The orders were pronounced on 31.05.2019 by the Tribunal.