2023 (9) TMI 209 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - mandation of recording satisfaction - HELD THAT - As evident from the record, in the present case, no satisfaction as required u/s 14A(2) was recorded by the AO, and the disallowance under section 14A of the Act was made only pursuant to the directions issued by the learned DRP. Thus the jurisdictional pre-condition as laid down in provisions of section 14A(2) of the Act was not fulfilled in the present case. Disallowance as computed by DRP was not by applying the mandatory computation provisions of Rule 8D of the Income Tax Rules, 1962 and the same was directed merely as a reasonable disallowance under section 14A(1) of the Act. Therefore, in view of the above, we do not find any basis for upholding the disallowance made under section 14A of the Act. Accordingly, the AO is directed to delete the same. As a result, grounds no.5 and 6, raised by the assessee are allowed. Allowance of interest expenditure u/s 57(iii) - interest expenditure claimed under the aforesaid section is not wholly and exclusively expended for the purpose of earning the interest income - DRP after duly noting the chronology of events, i.e. borrowing of interest-bearing funds by the assessee and thereafter advancing the same as interest-bearing loan to the sister concern, in its directions came to the conclusion that the interest expenditure claimed by the assessee is directly related to the interest income earned during the year under consideration. It is undisputed that the assessee utilised the interest-bearing borrowed funds for advancing the loans to the sister concern. It is pertinent to note that the violation of RBI guidelines on the usage of ECB funds for other purposes has no relevance in the allowance of deduction u/s 57(iii) - Therefore, we find no infirmity in the impugned final assessment order passed in conformity with the aforesaid directions of the DRP, whereby the interest expenditure was directed to be allowed under section 57(iii) of the Act against the interest income offered for taxation under the head income from other sources . Accordingly, the impugned final assessment order on this issue is upheld and the grounds raised by the Revenue are dismissed.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance under Section 14A of the Income Tax Act
3. Initiation of Penalty Proceedings under Section 271(1)(c)
4. Allowance of Interest Expenditure under Section 57(iii) of the Income Tax Act
5. Non-Compliance of Directions by the Dispute Resolution Panel (DRP)

Summary of Judgment:

Assessee's Appeal - A.Y. 2009-10:
1. Transfer Pricing Adjustment (Grounds No. 1-4):
- These grounds were not pressed by the learned Authorised Representative during the hearing and were dismissed as not pressed.

2. Disallowance under Section 14A (Grounds No. 5-6):
- The assessee claimed exempt dividend income without offering any disallowance under Section 14A. The DRP directed a disallowance of Rs. 3 lakh. The Tribunal found that the Assessing Officer (AO) did not record the required satisfaction under Section 14A(2) before making the disallowance. Therefore, the disallowance was deleted.

3. Initiation of Penalty Proceedings (Ground No. 7):
- This ground was dismissed as premature.

4. Result:
- The appeal by the assessee was partly allowed.

Revenue's Appeal - A.Y. 2009-10:
1. Allowance of Interest Expenditure under Section 57(iii):
- The AO disallowed the deduction of interest expenditure, but the DRP allowed it, finding a direct nexus between borrowed funds and the amount advanced. The Tribunal upheld the DRP's directions, dismissing the Revenue's appeal.

Assessee's Appeal - A.Y. 2010-11:
1. Transfer Pricing Adjustment (Grounds No. 1-4):
- These grounds were not pressed by the learned Authorised Representative during the hearing and were dismissed as not pressed.

2. Non-Compliance of DRP Directions (Ground No. 5):
- The AO did not fully comply with the DRP's directions regarding the deduction of interest expenditure. The Tribunal restored this issue to the AO for re-computation of total income as per the DRP's directions.

3. Disallowance under Section 14A (Grounds No. 6-7):
- The disallowance was admitted by the assessee before the DRP and was upheld by the Tribunal.

4. Result:
- The appeal by the assessee was partly allowed for statistical purposes.

Revenue's Appeal - A.Y. 2010-11:
1. Allowance of Interest Expenditure under Section 57(iii):
- Similar to the issue in A.Y. 2009-10, the Tribunal upheld the DRP's directions allowing the deduction of interest expenditure and dismissed the Revenue's appeal.

Final Outcome:
- Assessee's appeals for A.Y. 2009-10 and 2010-11 were partly allowed.
- Revenue's appeals for A.Y. 2009-10 and 2010-11 were dismissed.