2022 (9) TMI 90 - HC - Income Tax

Disallowance of interest expenditure u/s 36(l)(iii) - borrowed funds were not utilized for the purposes of the business of Assessee but diverted to Group Companies without charging any interest thereon - HELD THAT - Disallowance of interest expenditure made under Section 36(l)(iii) of the Act observed that the loans and advances included the investment in the immovable property and was part of the business activity, investment in the partnership firm was made wholly and exclusively for the purpose of the business, the advances recoverable and forward cover receivable included in the advances were business advances and the same were given to the suppliers with whom regular business transactions had been carried out, the advance to the DLF Ltd. given for the purpose of business and the other advances on which interest had been charged by the Assessee had been shown in the Schedule 17 forming part of the financial accounts. CIT (A) further noted that the loans and advances had been given on account of the Commercial Expediency and no notional interest could be charged on such advances given for the purposes of business. Addition u/s 14A read with Rule 8D - suo moto disallowance made by assessee - ITAT observed that the Appellant had own funds which were far more than the investments and the plain reading of Sections 14A(2) and 14A(3) showed that when the Assessee offered disallowance under Section 14A of the Act, the provisions of Section 14A(2) read with Rule 8D could not be invoked unless the Assessing Officer was dissatisfied about the correctness of disallowance so offered. Both the appellate authorities below, relying on the decision of this Court in Maxopp Investment Ltd. 2011 (11) TMI 267 - DELHI HIGH COURT affirmed by Supreme Court in Maxopp Investment Ltd. v. Commissioner of Income-tax 2018 (3) TMI 805 - SUPREME COURT deleted the addition made by the Assessing Officer under Section 14A of the Act observing that the Assessee had made a suo moto disallowance . Revenue appeal dismissed.

Summary

Issues:
1. Disallowance of interest expenditure under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Addition made under Section 14A read with Rule 8D of the Income Tax Rules, 1962.

Analysis:

Issue 1: Disallowance of interest expenditure under Section 36(1)(iii)
The appellant challenged the ITAT's order deleting the disallowance of interest expenditure of Rs.4,32,72,702 under Section 36(1)(iii) of the Income Tax Act, 1961. The appellant argued that the borrowed funds were not utilized for the business but diverted to Group Companies without interest charges. However, the CIT(A) and ITAT found that the loans and advances were part of the business activity, made for commercial expediency, and interest had been charged on certain advances. Citing legal precedents, including Taparia Tools case and SA Builders case, the ITAT held that if genuineness of business borrowings and purpose of borrowing are proved, no interest can be disallowed. The ITAT declined to interfere with the CIT(A)'s order, dismissing the revenue's appeal on this ground.

Issue 2: Addition made under Section 14A read with Rule 8D
Regarding the addition of Rs.37,40,940 under Section 14A read with Rule 8D, the ITAT noted that the appellant had own funds far exceeding the investments. Referring to Sections 14A(2) and 14A(3), the ITAT held that Rule 8D cannot be invoked if the Assessing Officer is satisfied with the disallowance offered by the Assessee. Both the CIT(A) and ITAT, relying on the decision in Maxopp Investment Ltd. case, deleted the addition made by the Assessing Officer under Section 14A. The Court, considering the concurrent findings of the appellate authorities, concluded that no substantial question of law arises for consideration and dismissed the appeal.

In conclusion, the High Court upheld the decisions of the CIT(A) and ITAT regarding the disallowance of interest expenditure and addition made under Section 14A, dismissing the appellant's appeal as no substantial question of law was found.