2022 (4) TMI 1225 - AT - Income Tax

Disallowance u/s 36(1)(iii) - Whether assessee has advanced these interest free funds or lower interest bearing funds? - HELD THAT - We do not find that any interest bearing funds have been used for advancing loan is to these parties when enough in non-interest-bearing funds are available with the assessee for advancing non-interest-bearing or lower interest-bearing funds to these parties. The presumption is always available in favour of the assessee that non-interest-bearing funds have been used for advancing to the parties, unless otherwise proved. In view of this the addition confirmed by the learned CIT-A u/s 36 (1) (iii) of the act deserves to be deleted. Hence deleted. Accordingly, ground number 1 of the appeal along with sub grounds is allowed. Disallowance u/s 14A read with rule 8D - HELD THAT - We find that during the year, the assessee has not earned any exempt income and further assessee denied that it has incurred any expenditure. Now therefore it is mandatory on part of the learned assessing officer to record a satisfaction that the claim of the assessee is not correct. Such is the mandate of the provisions of Section 14A(2) of the act. We find that the learned assessing officer has merely on the basis of the investment shown in the annual accounts of the assessee has invoked the provisions of Section 14A read with rule 8D and issued notice to the assessee. When assessee has categorically replied that it has not incurred any expenditure during the year the learned assessing officer is duty-bound to record a satisfaction that why the explanation furnished by the assessee is incorrect. Such satisfaction also has to be based on accounts of the assessee. If assessing officer merely says that as the investment decision are very complex the assessee should have incurred certain expenditure cannot satisfy the requirement of Section 14A (2) of the act. This shows that there is no reference to the accounts of the assessee. Accordingly, we find that assessing officer has failed to record any satisfaction prior to invoking of the provisions of rule 8D of income tax rules 1962 - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 36(1)(iii) of the Income Tax Act.
2. Disallowance under Section 14A of the Income Tax Act.

Detailed Analysis:

1. Disallowance under Section 36(1)(iii) of the Act:

The assessee challenged the disallowance of ?23,997,017 under Section 36(1)(iii) of the Income Tax Act, arguing that the interest expense was incurred for business purposes and should be allowed as a deduction. The Assessing Officer (AO) noted that the assessee had given an interest-free loan to M/s Beyond Pharma Ltd. amounting to ?6,47,91,216, and disallowed the interest expense at a rate of 12%, totaling ?7,774,946. The CIT(A) enhanced the disallowance to ?23,997,017, noting that loans were also advanced to other parties without charging interest or at lower rates.

The CIT(A) justified the disallowance by stating:
- The assessee did not provide complete workings of the interest received.
- Loans were not given for business purposes.
- The assessee had a high risk of advancing money to third parties, as evidenced by a write-off of ?87 lakhs.
- The Supreme Court decision in SA Builders Ltd. was not applicable due to lack of commercial expediency.
- The assessee was borrowing money at higher rates than the interest received.
- The general market rate of interest was 12%.

The assessee countered that it had sufficient interest-free funds (?10,909.78 lakhs) at the beginning of the year, which were more than the loans advanced (?23.84 crores). It argued that the fresh loan to Beyond Pharma Ltd. was financed by repayments from other parties. The Tribunal found merit in the assessee's argument, noting that the interest-free funds were sufficient to cover the loans and advances. The Tribunal concluded that the presumption was in favor of the assessee that non-interest-bearing funds were used for these advances, and thus, the disallowance under Section 36(1)(iii) was deleted.

2. Disallowance under Section 14A of the Act:

The assessee contested the disallowance of ?192,395 under Section 14A of the Act, arguing that no exempt income was earned during the year and no expenditure was incurred to earn such income. The AO had made the disallowance based on the investments shown in the annual accounts without recording specific satisfaction as required under Section 14A(2).

The Tribunal observed that the AO failed to record the necessary satisfaction that the assessee's claim of no expenditure was incorrect. The AO's assumption that investment decisions are complex and must involve some expenditure did not satisfy the requirement of Section 14A(2). The Tribunal concluded that the AO did not properly record satisfaction based on the assessee's accounts before invoking Rule 8D. Consequently, the disallowance under Section 14A was deleted.

Conclusion:

In conclusion, the appeal of the assessee was allowed. The disallowance under Section 36(1)(iii) amounting to ?23,997,017 was deleted due to the availability of sufficient interest-free funds. Similarly, the disallowance under Section 14A amounting to ?192,395 was deleted due to the AO's failure to record proper satisfaction. The order was pronounced in the open court on 25.04.2022.