2022 (8) TMI 1068 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - interest bearing funds had been diverted to sister concern, in the form of loans and advances for non-business purposes - HELD THAT - As from the material on record that no fresh loans and advances were made during the previous year relevant to the assessment year under consideration. All the loans and advances made to the sister concern were made in the earlier years, the additions made in the earlier assessment years by the disallowance of interest, came to be deleted by this Tribunal in assessee s own case for the assessment years A.Y. 2008-09 2017 (6) TMI 1371 - ITAT PUNE , A.Y. 2009-10 2017 (2) TMI 1293 - ITAT PUNE , A.Y. 2010-11 2017 (12) TMI 1398 - ITAT PUNE , A.Y. 2011-12 2019 (8) TMI 1835 - ITAT PUNE , A.Y. 2012-13 2020 (11) TMI 602 - ITAT PUNE . Therefore, even on the principle of consistency, no disallowance of interest u/s 36(1)(iii) is warranted. Accordingly, we do not find any illegality and perversity in the findings of the ld. CIT(A). Therefore, we do not find any merits in the ground of appeal no.2 and 3 filed by the Revenue. Disallowance u/s 14A - Admission of additional ground - HELD THAT - The fact that the respondent-assessee company had not earned any exempt income is evident from the material on record, therefore, for adjudication this issue it does not require any verification of fact or enquiry into the facts. Thus, it is crystal clear that it pure question of law requiring no verification of facts. No illegality and perversity in admitting this additional ground of appeal by the ld. CIT(A) as it is in consonance with the settled position of law. Thus, the finding of the ld. CIT(A) that in the absence of any exempt income, resort to the provisions of section 14A cannot be made, cannot be faulted - The fact that the assessee company itself suo moto offered disallowance ipso facto cannot be reason for invoking the provisions of section 14A, as there cannot be estoppel against law. Therefore, we do not find any merits in the grounds of appeal no.4 and 5 raised by the Revenue. Accordingly, these ground of appeal no.4 and 5 raised by the Revenue stand dismissed.

Issues Involved:
1. Disallowance of interest under Section 36(1)(iii).
2. Disallowance under Section 14A.
3. Addition on account of service tax under Section 43B.
4. Addition on account of notional rent on unsold flats.
5. Addition on account of cash credits.

Issue-wise Detailed Analysis:

1. Disallowance of Interest under Section 36(1)(iii):

The Assessing Officer (AO) disallowed interest expenses of Rs. 26,31,67,414/- for A.Y. 2013-14 and Rs. 3,73,84,490/- for A.Y. 2014-15, citing the diversion of interest-bearing funds to sister concerns for non-business purposes. The AO inferred this from the respondent-assessee's loans and advances to sister concerns without charging interest. The AO adopted an average interest rate of 14%. However, the Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance, noting that the assessee's interest-free funds exceeded the loans and advances to sister concerns. The CIT(A) relied on the Supreme Court's rulings in CIT vs. Reliance Industries Ltd. and East India Pharmaceutical Works Ltd., which established that when interest-free funds are sufficient to cover the loans, it should be presumed that the loans are made from these funds.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee's interest-free funds were indeed sufficient to cover the loans and advances. Additionally, no fresh loans were made during the relevant assessment year, and similar disallowances in previous years had been deleted by the Tribunal. Thus, the Tribunal found no merit in the Revenue's appeal on this issue.

2. Disallowance under Section 14A:

For A.Y. 2013-14, the AO disallowed Rs. 6,34,32,208/- under Section 14A, which the assessee had initially offered suo moto. The CIT(A) deleted this disallowance, citing the absence of exempt income during the relevant period, and relied on various judicial precedents, including the Delhi High Court's decision in Cheminvest Ltd. vs. CIT. The Tribunal upheld this decision, stating that in the absence of exempt income, Section 14A cannot be invoked, and the CIT(A) was correct in admitting the additional ground of appeal.

For A.Y. 2014-15, the AO disallowed Rs. 1,28,13,319/- under Section 14A. The CIT(A) again deleted this disallowance, citing the absence of exempt income. However, the Tribunal found that the assessee had earned exempt income of Rs. 2.04 crores and thus reversed the CIT(A)'s finding. The Tribunal directed the AO to compute the disallowance under Rule 8D(2)(iii) of the Income Tax Rules, considering only the investments that yielded exempt income.

3. Addition on Account of Service Tax under Section 43B:

For A.Y. 2013-14, the AO disallowed Rs. 49,93,213/- under Section 43B for unpaid service tax. The Tribunal's decision on this specific issue is not detailed in the provided text, but it is implied that the CIT(A)'s decisions were largely upheld.

4. Addition on Account of Notional Rent on Unsold Flats:

The AO added Rs. 1,05,000/- as notional rent for unsold flats for both A.Y. 2013-14 and A.Y. 2014-15. The CIT(A) directed the AO to delete this addition, and the Tribunal upheld this decision, finding no merit in the Revenue's appeal on this issue.

5. Addition on Account of Cash Credits:

For A.Y. 2014-15, the AO added Rs. 55,00,000/- on account of cash credits, citing the assessee's failure to prove the genuineness and creditworthiness of the credits. The CIT(A) deleted this addition, and the Tribunal upheld this decision, noting that the assessee's interest-free funds were sufficient to cover the loans and advances.

Conclusion:

The Tribunal dismissed the Revenue's appeals for A.Y. 2013-14 (ITA No.20/PUN/2020) and one of the appeals for A.Y. 2014-15 (ITA No.22/PUN/2020). The appeal for A.Y. 2014-15 (ITA No.21/PUN/2020) was partly allowed, with directions to the AO to recompute the disallowance under Section 14A. The Tribunal's decisions were based on established legal principles and judicial precedents, ensuring that the assessee's interest-free funds were appropriately considered in determining the disallowances.

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