2020 (11) TMI 602 - AT - Income Tax

Addition on account of bank interest on deposits not belonging to the assessee - HELD THAT - AR fairly submitted that this issue is covered against the assessee by the Tribunal order passed in the case of the assessee for the immediately preceding assessment year. Referring to Tribunal order for the assessment year 2011-12, the ld. AR pointed out that this issue came to be decided against the assessee - we uphold the action of the ld. CIT(A) in sustaining the disallowance at this level. This ground is not allowed. Addition u/s.14A read with Rule 8D - assessee made suo moto disallowance - HELD THAT - The difference emanated on account of the fact that the assessee did not consider share application money at the year-end as investment yielding exempt income, which the AO took it otherwise. It is found that similar issue came up for consideration before the Tribunal in case of the assessee for the assessment year 2009-10. A copy of such order has been placed on record. Tribunal has decided this issue in assessee s favour. Similar view has been reiterated by the Tribunal in its order for the assessment year 2010-11, whose copy has also been placed in the paper book. DR could not point out if the view of the Tribunal in such earlier years has been reversed or modified by the Hon ble High Court in any manner. Respectfully following the precedent, we set-aside the impugned order on this score and order to delete the disallowance sustained. Disallowance of interest - AO observed that the assessee diverted borrowed funds for non-business purpose. By applying interest rate at 12%, he computed the amount of disallowance - CIT(A) did not agree with the assessee and sustained the disallowance - HELD THAT - It is evident that the amount of shareholders fund available with the assessee at the beginning of the year was not claimed to have been utilized doubly by the assessee once for the purpose of avoiding disallowance u/s.14A and secondly, for claiming allowance of deduction of interest u/s.36(1)(iii). The assessee claimed it only once, that is, for claiming deduction of interest u/s 36(1)(iii) - Had the assessee claimed the benefit of utilization of shareholders fund for avoiding disallowance under section 14A and simultaneously for claiming deduction of interest in the year under consideration, the view point of the ld. CIT(A) would have been correct. Having not done so, the utilization of shareholders fund by the assessee towards making investment with sister concerns cannot be ignored. As the assessee has taken benefit of the ratio of Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT in respect of allowance of interest u/s.36(1)(iii) only, we hold that the addition cannot be sustained. We, therefore, order for the deletion of addition.

Summary

Issues:
1. Addition of bank interest on deposits not belonging to the assessee.
2. Disallowance under section 14A read with Rule 8D.
3. Disallowance of interest on borrowed funds diverted for non-business purpose.

Analysis:

1. Bank Interest Addition:
The first issue pertains to the addition of bank interest on deposits not belonging to the assessee. The Tribunal upheld the disallowance based on the assessee's own case for the preceding assessment year. The Tribunal referred to relevant portions of the order for the assessment year 2011-12, where a similar issue was decided against the assessee. Consequently, the Tribunal affirmed the Commissioner's decision to sustain the disallowance, thereby dismissing the ground raised by the assessee.

2. Disallowance under Section 14A read with Rule 8D:
The second issue revolves around the disallowance of a specific amount under section 14A read with Rule 8D. The Assessing Officer computed a differential disallowance amount as the assessee's suo moto disallowance was deemed inadequate. The dispute arose from the treatment of share application money pending allotment as exempt income. The Tribunal, after considering past orders in the assessee's favor for previous assessment years, decided to delete the disallowance. The Tribunal found that the treatment of share application money was consistent with earlier decisions, leading to the deletion of the disallowance.

3. Interest Disallowance on Borrowed Funds:
The final issue concerns the disallowance of interest on borrowed funds allegedly diverted for non-business purposes. The Assessing Officer computed the disallowance based on a 12% interest rate, resulting in a specific amount. The dispute centered on the utilization of shareholders' funds and the treatment of interest-free advances to sister concerns. Citing relevant case law, including decisions by the Bombay High Court and the Supreme Court, the Tribunal analyzed the adequacy of interest-free funds vis-a-vis the shareholders' funds. Ultimately, the Tribunal held that the disallowance could not be sustained as the assessee had not claimed double utilization of shareholders' funds for different purposes. Consequently, the Tribunal ordered the deletion of the addition related to interest disallowance.

In conclusion, the Tribunal partly allowed the appeal, ruling in favor of the assessee on the disallowance under section 14A read with Rule 8D and the interest disallowance on borrowed funds diverted for non-business purposes. The judgment demonstrates a thorough analysis of legal precedents and factual considerations to arrive at a reasoned decision in each issue raised before the Tribunal.