2023 (12) TMI 204 - AT - Income Tax

Disallowance u/s 14A - non recording any satisfaction note the AO made disallowance u/s 14A - suo-moto addition made by assessee ignored - HELD THAT - The tax authorities below have not at all taken into consideration the fact of suo moto disallowances and giving any reasons for not accepting the same. As fresh investment have been made out of the own funds raised by issuance of fresh equity and that accumulated balance of reserve and surplus of the assessee company or the borrowed funds have not been utilized for the purpose of investment. Consequently the issue needs to be restored to the files of Ld. AO, to take into consideration the principles of law recognized in Maxopp Investments Ltd. Case 2018 (3) TMI 805 - SUPREME COURT and assessee s own case by Hon ble Delhi High Court in 2018 (3) TMI 1718 - DELHI HIGH COURT and pass a fresh order for claim of disallowance of assessee u/s 14A of the Act. These grounds are decided in favour for statistical purposes. Allowability of deduction u/s 36(1)(vii) - interest free loans to subsidiary companies - Assessee contended that when there are funds available, both interest free or loan taken, then a presumption would arise that investments would be out of interest free funds generated or available with the company provided said funds are sufficient to meet investments - HELD THAT - Primarily questioning the commercial expediency of interest free loans allowability of deduction u/s 36(1)(vii) of the Act was examined. However, it transpires from record and as discussed above the assessee had sufficient surplus funds and had raised capital during the year by issuance of shares. Thus, merely because the assessee had also raised loans or paid interest against loans that does not justify the disallowance. The investment in subsidiary and related entities has to be made for commercial purpose to earn future profits. It is not the case of revenue that investment were made in any entity not having any nexus with the principal object of assessee company. The judgment of South Indian Bank Ltd. vs. Commercial of Income Tax 2021 (9) TMI 566 - SUPREME COURT also comes to the assistance of assessee where Hon ble Supreme Court recognized the principle that if interest free own funds are available with the assessee or exceeds investment, investment would be presumed to be made out of assessee s own fund. Thus, the Bench is convinced that the disallowance was not justified the same deserves to be deleted. The grounds are sustained.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of proportionate interest under Section 37(1) of the Income Tax Act.

Summary:

Issue 1: Disallowance under Section 14A

The Assessee filed an appeal against the disallowance of Rs. 6,37,90,540/- under Section 14A of the Income Tax Act. The Assessee argued that a suo moto disallowance of Rs. 64,02,092/- had already been made and that the Assessing Officer (AO) did not record any satisfaction note as required by law. The Assessee relied on the Supreme Court judgment in Maxopp Investment Ltd. vs. Commissioner of Income Tax, New Delhi, which mandates that the AO must record satisfaction before applying the theory of apportionment. The Tribunal observed that the AO did not consider the Assessee's suo moto disallowance and did not provide reasons for rejecting it. The Tribunal also noted that in the Assessee's own case for the assessment year 2010-11, similar disallowances were restricted by the First Appellate Authority and confirmed by the Tribunal, which was upheld by the Delhi High Court. Consequently, the Tribunal restored the issue to the files of the AO to reconsider the principles recognized in the Maxopp Investments Ltd. case and the Assessee's own case for AY 2010-11.

Issue 2: Disallowance of Proportionate Interest under Section 37(1)

The Assessee contested the disallowance of Rs. 78,20,000/- under Section 37(1) for interest expenses on funds borrowed and given as interest-free loans to related parties. The Assessee argued that sufficient surplus funds and capital receipts from share issuance were available, and the borrowed funds were not utilized for these loans. The Tribunal observed that the Assessee had sufficient surplus funds and capital receipts, and merely raising loans or paying interest does not justify the disallowance. The Tribunal relied on the Supreme Court judgment in South Indian Bank Ltd. vs. Commissioner of Income Tax, which recognizes that if interest-free own funds are available, investments are presumed to be made from these funds. The Tribunal concluded that the disallowance was not justified and deserved to be deleted.

Conclusion:

The Tribunal allowed the appeal, directing the AO to reconsider the disallowance under Section 14A in light of the Supreme Court judgment and previous assessments, and deleted the disallowance under Section 37(1) for proportionate interest. The order was pronounced on 30th June, 2023.