2019 (7) TMI 80 - AT - Income Tax

Disallowance u/s.36(1)(iii) - borrowed amount was invested in shares of a associate company - evidences from where it can be found out that Investments out of borrowed funds has or will generate this much of income - HELD THAT - When all the details of investments of shares and working of interest paid has been provided to the Department, asking for any other evidences relating to what income will generate to the assessee, at this stage, first of all, it is not the requirement of Section 36(1)(iii) and secondly, at this stage, it is just asking for some hypothetical evidences. The very fact that funds borrowed were invested in shares of an associate company itself demonstrates the business strategy of the assessee company. As find in the case of Hero Cycles P. Ltd. Vs. CIT 2015 (11) TMI 1314 - SUPREME COURT has held that where loans were advanced by the assessee to its various associate concerns as a part of business strategy, interest on such loans was allowable deduction u/s.36(1)(iii). Extending this proposition to the facts of the present case, investments in shares of the associate concerns by the assessee is part of business strategy and therefore, interest on such loans are allowable deduction u/s.36(1)(iii) In view of the above examination of facts and legal propositions, we hold that the investments made by the assessee in M/s. Kimplas Piping Systems Ltd. were wholly and exclusively for the purpose of business and therefore, no disallowance u/s.36(1)(iii) of the Act could be made in the present case. Hence, we set aside the order of the Ld. CIT(A) on this issue and direct the AO to delete the addition - Decided in favour of assessee. Disallowance u/s 14A - non recording of satisfaction by AO on judicious and objective application of mind. HELD THAT - We find that in the case of Godrej Boyce Manufacturing Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT , it has been held that it is a mandatory requirement of the law u/s.14A that the AO has to scrutinize the claim of the assessee before making any disallowance. However, in the instant case, without looking into these facts, the disallowance was made. The Assessing Officer has not recorded satisfaction on judicious and objective application of mind. Also in the case of CIT Vs. Delite Industries Ltd. 2009 (2) TMI 498 - BOMBAY HIGH COURT has held that if the investments from whom no exempt income is received then there is no question of making any disallowance u/s.14A of the Act on these investments. Referring to facts of the present case before us, wherein no exempt income has been earned by the assessee, in such case, no disallowance can be called for u/s.14A - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest paid on borrowed funds under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Disallowance under Section 14A of the Income Tax Act, 1961 for assessment year 2013-14.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Paid on Borrowed Funds under Section 36(1)(iii):

The assessee declared income from house property and business/profession, primarily engaged in technical consultancy and manufacturing of plastic fittings. The assessee invested ?1,75,00,000 in equity shares of M/s. Kimplas Piping Systems Ltd. using borrowed funds from Bajaj Finance Ltd. The Assessing Officer (AO) disallowed the interest of ?2,91,267 paid on these borrowed funds under Section 36(1)(iii) of the Income Tax Act, 1961, as they were not utilized for business purposes.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the assessee failed to demonstrate how the investment served its business interest. The CIT(A) emphasized that the investment did not generate taxable income, thus disallowing the interest.

During the hearing, the assessee's Authorized Representative (AR) argued that the investment in shares was for business purposes, and the interest should be allowed as a deduction. The AR cited judicial precedents, emphasizing that the term "for the purpose of business" is broader than "for the purpose of earning profits."

The Tribunal noted that the funds were indeed borrowed and invested in shares of an associate company, indicating a business strategy. The Tribunal referred to the Supreme Court's decision in Hero Cycles P. Ltd. Vs. CIT, which allowed interest on loans advanced to associate concerns as a business strategy. The Tribunal concluded that the investment was for business purposes, and the interest on such loans is deductible under Section 36(1)(iii). The Tribunal set aside the CIT(A)'s order and directed the AO to delete the addition, allowing grounds Nos. 2 to 2.4 for assessment year 2012-13.

2. Disallowance under Section 14A for Assessment Year 2013-14:

For assessment year 2013-14, the assessee raised an additional ground regarding the disallowance of ?1,92,844.28 under Section 14A of the Income Tax Act, 1961. The AO made a disallowance under Section 14A read with Rule 8D, which the CIT(A) partly confirmed.

The assessee contended that no exempt income was earned during the year, making Section 14A inapplicable. The Tribunal observed that the AO did not scrutinize the claim judiciously and based the disallowance on assumptions. The Bombay High Court in CIT Vs. Delite Industries Ltd. held that if no exempt income is earned, no disallowance under Section 14A can be made.

The Tribunal, following the Bombay High Court's decisions, concluded that no disallowance under Section 14A is warranted when no exempt income is earned. The additional ground for assessment year 2013-14 was allowed.

Conclusion:

Both appeals for assessment years 2012-13 and 2013-14 were partly allowed. The Tribunal directed the AO to delete the disallowance of interest under Section 36(1)(iii) and the disallowance under Section 14A for assessment year 2013-14. The judgment emphasized the broader interpretation of "for the purpose of business" and the inapplicability of Section 14A when no exempt income is earned.