2020 (1) TMI 1049 - AT - Income Tax

Addition on account of interest paid u/s 36(1)(iii) - interest bearing funds to group company without charging interest - CIT-A deleted the addition - HELD THAT - The assessee is in the business of real estate, entertainment power generation and the loans advances include investments in the property business of the assessee. Hence, it can be said that the advances recoverable included the advances which are business advances on which no interest is disallowable. It was also part of the record that another advances interest has been charged by the assessee as found out by the ld. CIT (A) on going through the Schedule 17 of the balance sheet. Since, the loans advances have been given on account of commercial expediency and notional interest can be charged on such advances or interest can be disallowed u/s 36(1)(iii). In the case of Taparia Tools 2015 (3) TMI 853 - SUPREME COURT observed that while examining the allowability of deduction, the Assessing Officer is to consider the genuineness of the business borrowings and that the borrowings was further purpose of business and genuine. Once, the genuineness is proved and interest is paid on the borrowings, no interest can be disallowed on the grounds that the assessee has not correctly used the amounts borrowed. Also in the case of SA Builders 2006 (12) TMI 82 - SUPREME COURT held that in case of interest bearing loans taken and interest free advances given, what is to be looked into is the measure of commercial expediency and for the purpose of the business . Hence, keeping in view the facts of the case and legal prepositions laid down on this aspect of allowability of interest u/s 36(1)(iii), we hereby decline to interfere with the order of the ld. CIT (A). The appeal of the revenue on this ground is dismissed. Disallowance u/s 14A - suo-moto disallowance by assessee - CIT (A) deleted the addition owing to non-adherence in accordance with the provisions of Section 14A(2) - DR argued that to invoke Rule 8D(2), no satisfaction is required as it is an automatic provision for determining the disallowance - HELD THAT - While a lot of emphasis is placed by the counsel on wordings of section 14A(2) which refer to the need of Assessing Officer's satisfaction to the effect that the claim made by the assessee is incorrect, it simply overlooks the provisions of section 14A(3) which state that a disallowance u/s 14A(2) can also be made in a case in which assessee claims that no expenditure has been incurred for earning the tax exempt income. A plain reading of the statutory provisions of section 14A(2) and (3) shows that when assessee offers a disallowance u/s 14A,the provisions of section 14A(2) read with Rule 8D cannot be invoked unless the Assessing Officer is satisfied about incorrectness of the disallowance so offered, but when assessee does not offer any disallowance u/s 14A on his own, the provisions of section 14A(2) read with Rule 8D can be invoked without there being any need to express satisfaction about the incorrectness of such a claim. In the instant case, the assessee had made a suo-moto disallowance and the Assessing Officer has not recorded the dissatisfaction about the disallowance suo-moto made by the appellant and has not identified any expenditure which can be considered to be expended in connection with the investment activity. The appellant has own funds which are far more than the investments. The plain reading of the statutory provisions of section 14A(2) and 14A(3) shows that when the assessee offered the disallowance u/s 14A, the provisions of Section 14A(2) read with Rule 8D cannot be invoked unless the Assessing Officer is dissatisfied about the correctness of the disallowance so offered. Suo-moto disallowance made by the assessee, the further disallowance made by the Assessing Officer under Rule 8D(2)(ii) (iii) read with Section 14A, is hereby deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition made by the AO on account of interest paid under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Deletion of additions made by the AO under Section 14A of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Addition on Account of Interest Paid under Section 36(1)(iii):

The revenue challenged the deletion of an addition amounting to ?4,32,71,702/- made by the Assessing Officer (AO) on account of interest paid under Section 36(1)(iii) of the Income Tax Act, 1961. The AO contended that the interest-bearing funds were extended to a group company without charging interest, which was not for business purposes. The AO cited several case laws to support the disallowance, asserting that the borrowed capital must remain invested in the business and not be diverted as interest-free loans.

The CIT (A), however, deleted the addition, reasoning that the loans extended were neither colorable nor illusory and were used for business purposes. The Tribunal upheld this view, noting that the assessee was engaged in real estate, entertainment, and power generation, and the advances included business-related investments. The Tribunal cited the Supreme Court's judgment in Taparia Tools Vs JCIT, which emphasized the genuineness of business borrowings. The Tribunal concluded that since the advances were made on account of commercial expediency, no notional interest could be charged, and no disallowance under Section 36(1)(iii) was warranted. Consequently, the revenue's appeal on this ground was dismissed.

2. Deletion of Additions Made under Section 14A:

The revenue also contested the deletion of an addition amounting to ?37,40,940/- made by the AO under Section 14A of the Income Tax Act, 1961. The AO argued that the provisions of Section 14A(2) read with Rule 8D could be invoked without the necessity of expressing dissatisfaction with the assessee's disallowance. The CIT (A) had deleted the addition, citing the jurisdictional High Court's judgment in Maxxop Investment Ltd., which stated that the AO must record dissatisfaction with the correctness of the assessee's claim before determining the amount of expenditure under Rule 8D.

The Tribunal upheld the CIT (A)'s decision, emphasizing that the AO did not record any dissatisfaction with the assessee's suo-moto disallowance of ?6,76,757/-. The Tribunal noted that the assessee had sufficient own funds, far exceeding the investments generating exempt income. The Tribunal reiterated that the AO's jurisdiction to determine the amount of expenditure under Rule 8D is triggered only if the AO records dissatisfaction with the assessee's claim. Since the AO failed to do so, the further disallowance made under Rule 8D(2)(ii) & (iii) read with Section 14A was deleted. Consequently, the revenue's appeal on this ground was also dismissed.

Conclusion:

In conclusion, the Tribunal dismissed the revenue's appeal, upholding the CIT (A)'s deletion of additions made on account of interest paid under Section 36(1)(iii) and under Section 14A of the Income Tax Act, 1961. The Tribunal emphasized the necessity of recording dissatisfaction by the AO before invoking Rule 8D and the commercial expediency of the advances made by the assessee.