2020 (11) TMI 365 - AT - Income Tax

Interest expenses paid to the related parties being excessive - Disallowance u/s. 36(I)(iii) - assessee has paid interest to various parties @ 24% and to some of the parties @ 12% - assessee explained that non banking financial institutions were charging interest between 18 to 24% for short term loan and also need security or mortgage against the loan - AO not agreed with the assessee and stated that assessee was unable to prove the reasonableness of the payment made u/s. 40A(2)(b), therefore, restricted the rate of interest on loan to the extent of 18% as against 24% paid by the assessee, the excess interest - HELD THAT - As decided in own case 2020 (6) TMI 193 - ITAT AHMEDABAD There cannot be any disallowance for the year under consideration on the money borrowed in the earlier year. As relying on SRIDEV ENTERPRISES 1991 (1) TMI 52 - KARNATAKA HIGH COURT we hold that there cannot be any disallowance on account of interest expenses being excessive paid to the related parties under section 40A of the Act. Hence we set aside the finding of the learned CIT (A) and direct the AO to delete the addition made by him - disallowance on excess interest payment made u/s. 36(1)(iii) is deleted. Therefore, this ground of appeal of the assessee is allowed. Disallowance u/s. 14A - HELD THAT - We hold that no disallowance of interest expense claimed by the assessee can be made on account of investments under the provision of section 14A r.w.r. 8D of Income Tax Rules. Hence, we reverse the order of the authorities below. The AO is directed to delete the addition made by him on account of the interest expenses component. Accordingly, this ground of appeal is partly allowed. Disallowance u/s. 36(1)(va) r.w.s. 2(24)(x) - assessee has defaulted in depositing the contribution of employee s provided fund and ESIC within the prescribed due date - HELD THAT - During the course of appellate proceedings before us, the ld. counsel has agreed that this issue has been decided by the Hon ble Jurisdictional High Court in the case of CIT vs. GSRTC 2014 (1) TMI 502 - GUJARAT HIGH COURT against the assessee.

Issues Involved:
1. Disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act.
2. Invocation of Rule 8D without recording dissatisfaction.
3. Disallowance under Section 14A read with Rule 8D of the Income-tax Rules, 1962.
4. Credit of owned funds while computing disallowance under Section 14A read with Rule 8D.
5. Disallowance under Section 14A while calculating book profit under Section 115JB.
6. Disallowance of employee's contribution towards PF and ESIC under Section 36(1)(va) read with Section 2(24)(x).
7. Verification of deposit of PF and ESIC within the prescribed period.
8. Breach of law and principles of natural justice by lower authorities.
9. Levy of interest under Section 234A/B/C of the Act.

Detailed Analysis:

1. Disallowance of Interest Expenses under Section 36(1)(iii):
The assessee contested the disallowance of ?22,21,096/- under Section 36(1)(iii), which was based on the Assessing Officer’s (AO) restriction of the interest rate to 18% instead of the 24% paid by the assessee. The AO argued that the assessee failed to prove the reasonableness of the payment under Section 40A(2)(b). The CIT(A) upheld this disallowance. However, the ITAT referred to a similar case for the assessment year 2012-13 where the disallowance was deleted due to the lack of comparable cases presented by the AO. The ITAT ruled in favor of the assessee, deleting the disallowance.

2. Invocation of Rule 8D without Recording Dissatisfaction:
This issue was not separately adjudicated in the provided judgment, and thus no specific analysis was provided.

3. Disallowance under Section 14A read with Rule 8D:
The AO made a disallowance of ?3,85,005/- under Section 14A, which the CIT(A) restricted to ?1,54,676/-. The ITAT noted that the assessee had substantial interest-free funds exceeding the investment amount, following precedents from the Bombay High Court and Gujarat High Court. Consequently, the ITAT deleted the disallowance related to interest expenses but upheld the administrative expenditure disallowance of ?37,726/-.

4. Credit of Owned Funds while Computing Disallowance under Section 14A read with Rule 8D:
The ITAT acknowledged that the assessee had sufficient interest-free funds to cover the investments, thus no disallowance of interest expenses was warranted. This was consistent with previous rulings by various High Courts.

5. Disallowance under Section 14A while Calculating Book Profit under Section 115JB:
The ITAT noted that the Special Bench of the ITAT in ACIT vs. Vineet Investments ruled that disallowance under Section 14A read with Rule 8D should not be considered while computing book profit under Section 115JB. Therefore, this ground of the assessee’s appeal was allowed.

6. Disallowance of Employee's Contribution towards PF and ESIC under Section 36(1)(va) read with Section 2(24)(x):
The AO disallowed ?6,09,138/- for delayed deposit of employee contributions to PF and ESIC. The CIT(A) upheld this disallowance. The ITAT agreed with the CIT(A), noting that the Jurisdictional High Court in CIT vs. GSRTC ruled against the assessee in similar circumstances. Thus, this ground of appeal was dismissed.

7. Verification of Deposit of PF and ESIC within the Prescribed Period:
This issue was acknowledged but not separately adjudicated as the main disallowance was upheld based on jurisdictional precedent.

8. Breach of Law and Principles of Natural Justice by Lower Authorities:
This issue was not separately adjudicated in the provided judgment, and thus no specific analysis was provided.

9. Levy of Interest under Section 234A/B/C:
This issue was not separately adjudicated in the provided judgment, and thus no specific analysis was provided.

Conclusion:
The ITAT allowed the appeal partly, deleting the disallowance under Section 36(1)(iii) and the interest component under Section 14A, while upholding the administrative expenditure disallowance and the disallowance under Section 36(1)(va). The ITAT also ruled that disallowance under Section 14A should not affect book profit computation under Section 115JB.

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