2021 (8) TMI 32 - AT - Income Tax

Addition on account of interest chargeable u/s 36(1)(iii) on interest free advances given to group companies - HELD THAT - We find from the order of the Assessing Officer that most of the investments/advances are continued from last year i.e. assessment year 2012-13, wherein the Tribunal has deleted the disallowance under section 36(1)(iii) of the Act on the ground that advances/interest free loans have been given for business purposes in view of the commercial expediency. The facts of the year under consideration are also identical to facts of the case for assessment year 2011-12. In view of the above, respectfully following the decision of the Tribunal 2018 (6) TMI 1776 - ITAT DELHI and decision of the Hon ble Delhi High Court 2019 (1) TMI 1393 - DELHI HIGH COURT we do not find any infirmity in the order of the Ld. CIT(A) on the issue in dispute and accordingly, we uphold the same. The ground of the appeal of the Revenue is accordingly dismissed. Disallowance u/s 14A r.w.r. 8D - HELD THAT - In the case of Joint Investment Private Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT wherein the disallowance has been restricted to the quantum of exempted income earned by the assessee in the relevant year. Before the Assessing Officer, the assessee mentioned that share of profit from partnership firm was claimed as exempt and Ld. CIT(A) has also restricted the disallowance to this amount. Respectfully, following the decision of the Hon ble Delhi High Court as cited by the Learned Counsel of the assessee, we direct the Assessing Officer to restrict the disallowance under section 14A of the Act to the quantum of exempted income earned by the assessee during the year under consideration. Accordingly, the ground of the appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of addition made by the Assessing Officer (AO) on account of interest chargeable under Section 36(1)(iii) of the Income Tax Act.
2. Restriction of disallowance under Section 14A of the Income Tax Act by the Commissioner of Income Tax (Appeals) [CIT(A)].

Issue-Wise Detailed Analysis:

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

The Revenue challenged the CIT(A)'s decision to delete an addition of ?3,15,81,435 made by the AO under Section 36(1)(iii) for interest on interest-free advances given to group companies. The AO had observed that the assessee had taken unsecured loans amounting to ?1,635,24,22,344 and paid interest of ?186,46,38,574. The AO contended that the borrowed funds were used for interest-free loans to related parties and thus disallowed the interest deduction.

The assessee argued that the disallowance had been deleted by the Tribunal in previous assessment years (2011-12 and 2012-13), and these decisions were upheld by the Delhi High Court. The Tribunal noted that the advances and investments were part of the business activity and were made for commercial expediency. The CIT(A) had previously found that the loans and advances included investments in immovable property and partnership firms, which were part of the business activity.

The Tribunal upheld the CIT(A)'s order, citing the Delhi High Court's decision that commercial expedience justified the nature of the transactions. The Tribunal also referenced the Supreme Court's rulings in S.A. Builders Ltd. and Taparia Tools, which emphasized that business expenditures made on grounds of commercial expediency are allowable.

2. Restriction of Disallowance under Section 14A:

The Revenue also contested the CIT(A)'s decision to restrict the disallowance under Section 14A to ?21,95,216, as opposed to the AO's disallowance of ?40,06,714. The AO had made the disallowance based on the average investment in equity shares, invoking Rule 8D of the Income Tax Rules after expressing dissatisfaction with the assessee's accounts.

The assessee argued that the disallowance should be limited to the exempt income earned, referencing the Delhi High Court's decision in Joint Investment Private Limited Vs. CIT. The CIT(A) had restricted the disallowance to the exempt income claimed by the assessee, which was ?21,95,216.

The Tribunal agreed with the CIT(A) and the assessee's reliance on the Delhi High Court's ruling. It directed the AO to restrict the disallowance under Section 14A to the quantum of exempt income earned, thereby dismissing the Revenue's appeal on this ground.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The Tribunal found no infirmity in the CIT(A)'s deletion of the interest disallowance under Section 36(1)(iii) and agreed with the restriction of the disallowance under Section 14A to the amount of exempt income earned by the assessee. The Tribunal's decision was pronounced in the open court on 30th July 2021.