2022 (8) TMI 196 - AT - Income Tax

Addition on account of interest - excessive interest on the borrowings - CIT-A deleted the addition - HELD THAT - AO on the basis of working given in the assessment order had concluded that assessee had charged lower interest on the amount advanced as compared to the higher interest paid on the amount borrowed. AO thereafter, worked out the interest that should have been charged by the assessee. When the matter was carried before CIT(A), CIT(A) after considering the submissions of the assessee had given a finding that the average rate of interest paid by the assessee was less than the average rate of interest earned by the assessee and thus assessee had not paid excessive interest on the borrowings. He has further given a finding that the addition made by AO was based on erroneous working. Before us, Revenue has not pointed any fallacy in the findings of CIT(A). In such a situation, we find no reason to interfere with the order of CIT(A). Thus the ground of Revenue is dismissed. Disallowance u/s 14A - grievance of the assessee in this ground is that AO had considered the investment in mutual funds while working out the disallowance under Rule 8D - HELD THAT - On perusal of the investments schedule placed in the audited Balance Sheet reveals that assessee has stated investment in mutual funds and also stated the investment in equity shares of ICICI Advantages - In view of the aforesaid facts, we do not find any merit in the submissions of the Learned AR that the investments are in mutual funds and therefore, needs to be excluded. We, thus, dismiss the Ground of the cross objection of the assessee.

Summary

Issues:
1. Disallowance of interest expenses based on methodology adopted by the Assessing Officer.
2. Disallowance under section 14A of the Act for investments in mutual funds.

Analysis:

Issue 1: Disallowance of interest expenses
The Revenue appealed against the CIT(A)'s order that granted partial relief to the assessee regarding the disallowance of interest expenses. The Assessing Officer (AO) had calculated that the assessee was paying interest at a higher rate on loans compared to the interest charged on advances given. The AO concluded that the interest-bearing funds were diverted, leading to a disallowance of Rs. 2,12,94,303. However, the CIT(A) found errors in the AO's calculations and determined that the average interest paid was less than the average interest earned by the assessee. Consequently, the CIT(A) deleted the addition made by the AO. The Revenue's appeal was dismissed as no fallacy was found in the CIT(A)'s findings.

Issue 2: Disallowance under section 14A for investments in mutual funds
The assessee raised a cross objection challenging the disallowance under section 14A for investments in mutual funds. The assessee argued that mutual fund investments should be excluded from the disallowance calculation. The AO had considered mutual fund investments while working out the disallowance under Rule 8D of the Income Tax Rules. However, the Tribunal noted that the investments schedule in the audited Balance Sheet included investments in mutual funds along with equity shares. As a result, the Tribunal dismissed the ground raised by the assessee, upholding the AO's decision to include mutual fund investments in the disallowance calculation.

In conclusion, both the appeal of the Revenue and the cross objection of the assessee were dismissed by the Tribunal, upholding the decisions made by the CIT(A) regarding the disallowance of interest expenses and the inclusion of mutual fund investments in the disallowance under section 14A.