2020 (11) TMI 491 - AT - Income Tax

Disallowance u/s 14A - Assessee has made suo moto disallowance - Non recording of satisfaction - HELD THAT - AO without recording any satisfaction to the correctness of the claim of the assessee proceeded to apply provisions of Rule 8D of the Income Tax Rules for disallowances u/s 14A - This is against the mandate of the provisions of section 14A(2) - recording of the satisfaction about the correctness of the claim of the assessee with respect examination of accounts is the primary conditions to invoke any disallowance u/s 14A - several judicial precedents relied upon before us also held so - AO has failed to record any satisfaction with respect to the correctness of claim of the assessee of not incurring any expenditure to earn exempt income on examination of the account the disallowance made by the AO and disallowance restricted by the ld CIT(A) cannot be upheld Interest paid to the bank u/s 36(1)(iii) - assessee has given loans and advances to various sister concern and other parties on which interest has not been charged - HELD THAT - In the present case the assessee has interest free funds available in the form of share capital and free reserve amounting to 37.05 crores whereas interest free loans and advances were only 17.32 crores. Therefore it is apparent that assessee has sufficient interest free funds available to advance the above loan to its sister concern free of interest. The issue is squarely covered in favour of the assessee in CIT Vs. Reliance Industries Ltd 2019 (1) TMI 757 - SUPREME COURT wherein it has been held that when the interest free funds available to the assessee were sufficient to make its investment which could be presumed that such interest free loans are made from interest free funds available with the assessee - we direct the ld AO to delete the disallowance of interest expenditure - Decided in favour of assessee.

Summary

Issues:
1. Disallowance u/s 14A of the Income Tax Act, 1961
2. Disallowance of interest expenditure under section 36(1)(iii)

Issue 1: Disallowance u/s 14A of the Income Tax Act, 1961:

The appeal was filed against the order confirming disallowances under section 14A of the Act. The assessee earned exempt income of ?173,455 but claimed no expenditure was incurred and made a suo moto disallowance of ?50,000 under section 14A. The Assessing Officer (AO) applied Rule 8D and disallowed ?304,198. The Commissioner of Income Tax (Appeals) [CIT(A)] restricted the disallowance to ?173,455. The Tribunal held that the AO did not record satisfaction on the correctness of the claim before applying Rule 8D, which is a prerequisite under section 14A(2). As no satisfaction was recorded, the disallowance made by the AO and confirmed by the CIT(A) could not be upheld. Therefore, the disallowance of ?173,455 under section 14A was directed to be deleted.

Issue 2: Disallowance of interest expenditure under section 36(1)(iii):

The AO disallowed interest expenditure of ?2,677,324 as the assessee had given interest-free loans to sister concerns. The CIT(A) confirmed the disallowance, stating it lacked commercial expediency. The Tribunal noted that the assessee had interest-free funds exceeding the loans given, indicating the loans were made from interest-free funds. Citing the decision in CIT Vs. Reliance Industries Ltd, it was held that when interest-free funds are sufficient to make investments, loans are presumed to be from interest-free funds. Therefore, the disallowance of interest expenditure of ?2,677,324 was directed to be deleted.

In conclusion, the appeal of the assessee was allowed on both issues, and the orders for disallowances under section 14A and section 36(1)(iii) were set aside.