2021 (9) TMI 836 - AT - Income Tax

Disallowance u/s 14A - Allowability of interest expenses - HELD THAT - Disallowance by taking resort to section 14A cannot be made as the assessee has not earned any exempt income, secondly when the assessee is having interest free fund the expenditure of interest incurred on borrowed funds, cannot be disallowed merely on the ground that the assessee is required to prove nexus between the interest free advances/loan given to the related parties; and thirdly without prejudice to other submissions, the interest earned by the assessee to the extent is eligible for set off against interest payment - Thus, the addition could be made. CIT(A) dismissed the appeal purely on the basis that the assessee failed to establish that borrowed fund was utilized for the purpose of business.As noticed even before CIT(A), it was submitted that the assessee had sufficient interest free fund available for making advances. It was also stated that since no tax free income is earned, hence no disallowance could be made. Lastly, it was also stated that the assessee is eligible for setting off interest earned and offered for taxation. Admittedly, no finding is recorded by the Ld.CIT(A) on these submissions. Revenue has not disputed the fact that the authorities below have not allowed set off of the interest earned and offered for tax. Moreover, the assessee has not earned any exempt income under these undisputed facts, the additions made by invoking the provision of section 14A of the Act is hereby restricted to a sum of ₹ 7,14,646/- as prayed by the assessee. Thus, grounds raised by the assessee in this appeal are allowed.

Summary

Issues:
Disallowance of interest expenses under section 36(1)(iii) of the Income Tax Act, applicability of section 14A, availability of interest-free funds, set-off of interest earned against interest payment.

Analysis:

1. Disallowance of Interest Expenses under Section 36(1)(iii):
- The Assessing Officer disallowed interest expenses of ?46,29,509, citing that no business transactions were conducted during the year. Additionally, the AO observed that interest-free funds were available with the assessee to cover the interest-free advances made. The CIT(A) upheld this disallowance, leading to the appeal.
- The appellant argued that the interest paid was eligible for deduction under section 36(1)(iii) of the Act. They also contended that the disallowance was not justified as per legal precedents, including the Supreme Court's decision in CIT vs. Reliance Industries. However, the CIT(A) did not address these arguments satisfactorily, leading to the appeal before the Tribunal.

2. Applicability of Section 14A:
- The Assessing Officer disallowed the interest expenses by referring to section 14A of the Act, even though the assessee did not earn any tax-free income. The appellant argued that since no tax-free income was earned, the disallowance under section 14A was unwarranted.
- The Tribunal noted that the assessee had not earned any exempt income, and hence, restricted the disallowance under section 14A to ?7,14,646, as requested by the appellant. This decision was based on the undisputed fact that the assessee had not earned any exempt income.

3. Availability of Interest-Free Funds:
- The appellant contended that they had sufficient interest-free funds to provide interest-free loans. They relied on judicial precedents to support their argument. The Tribunal noted that the appellant had interest-free funds available and that the disallowance based on the lack of nexus between interest-free advances and fund availability was not justified.
- The Tribunal emphasized that the CIT(A) did not address the submissions regarding the availability of interest-free funds and the eligibility for setting off interest earned against interest payment. As a result, the Tribunal allowed the appeal, recognizing the appellant's contentions regarding the availability of interest-free funds.

4. Set-Off of Interest Earned Against Interest Payment:
- The appellant also argued that the interest earned should be set off against the interest payment, reducing the disallowance amount. The Tribunal acknowledged this argument and allowed the set-off, limiting the disallowance to ?7,14,646 based on the interest earned and offered for taxation.

In conclusion, the Tribunal allowed the appeal, emphasizing the availability of interest-free funds, the inapplicability of section 14A due to the absence of tax-free income, and the eligibility for setting off interest earned against interest payment. The decision provided relief to the appellant by restricting the disallowance amount and addressing the issues raised effectively.