2024 (2) TMI 394 - AT - Income Tax

Disallowance of interest expenditure - interest-free advances given to the related parties - HELD THAT - From the perusal of the Balance Sheet of the assessee we find that the assessee has share capital and reserves and surplus which is more than interest-free loan, advanced by the assessee to the related parties. We find that the Hon'ble Jurisdictional High Court in CIT v/s Reliance Utilities Power Ltd., 2009 (1) TMI 4 - BOMBAY HIGH COURT held that if funds are available with the assessee, which are sufficient to meet the investment, then the presumption would arise that the investment is made out of funds so available with the assessee. Accordingly, we find no basis in the proportionate disallowance of interest expenditure made by the AO and upheld by the learned CIT(A). Disallowance on account of sales promotion expenses - HELD THAT - As per the assessee, the entries pertaining to aforesaid expenditure were passed through a common ledger named Ramesh Chand (employee of the company responsible as a cost centre). It is further the plea of the assessee that the said entry was passed to the said account only for the sake of accounting convenience so that all the expenses related to sales promotion paid to agents/drivers/mechanics can be accumulated under one ledger. We find that a similar issue came up for consideration in the preceding assessment year before the coordinate bench of the Tribunal in Lakozy Motors Ltd 2018 (5) TMI 2170 - ITAT MUMBAI wherein restored the issue to the file of the AO for examination afresh. During the hearing, AR submitted that in the remand proceedings, the AO made the disallowance of 15% of the aforesaid expenditure and the same has been accepted by the assessee. Since it is undisputed that the nature of the expenditure is similar to the preceding year, therefore the AO is directed to restrict the disallowance to 15% of the aforesaid expenditure in the present case. As a result, ground No. 2 raised in assessee s appeal is partly allowed. Disallowance u/s 14A read with Rule 8D - Assessee specifically submitted that during the year under consideration, no dividend income was earned by it out of the investments - HELD THAT - We find that in Cheminvest Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year. We further find that in Pr.CIT v/s Kohinoor Project (P) Ltd. 2020 (1) TMI 1161 - BOMBAY HIGH COURT rendered similar findings and dismissed the Revenue s appeal on a similar issue. Since, in the present case, the assessee has not earned any dividend income, therefore, respectfully following the aforesaid judicial pronouncements, disallowance of expenditure under section 14A read with Rule 8D is not sustainable. We further find that vide amendment by the Finance Act, 2022, the non-obstante clause and explanation were inserted in section 14A of the Act to the effect that the section shall apply even if no exempt income has accrued or arisen or has been received during the year. We find that while dealing with the issue of whether the aforesaid amendment by the Finance Act, 2022 is prospective or retrospective in operation in PCIT vs M/s Era infrastructure (India) Ltd, 2022 (7) TMI 1093 - DELHI HIGH COURT held that the amendment by Finance Act, 2022 in section 14A is prospective and will apply in relation to the assessment year 2022 23 and subsequent assessment years. Thus, even in view of the aforesaid amendment also, the disallowance under section 14A read with Rule 8D is not permissible in the present case. Disallowance computed under section 14A read with Rule 8D is directed to be deleted. Decided in favour of assessee.

Summary

Issues involved:
The judgment involves the appeal filed by the assessee challenging the order passed under section 250 of the Income Tax Act, 1961 by the Commissioner of Income Tax (Appeals) for the assessment year 2013-14.

Issue 1: Disallowance of interest expenditure
The assessee challenged the disallowance of interest expenditure of INR 21,48,282 due to interest-free advances given to related parties. The AO disallowed the proportionate interest expenditure, but the tribunal found that the funds available with the assessee were sufficient to meet the investment, leading to the deletion of the disallowance.

Issue 2: Disallowance of sales promotion expenses
The appeal also raised the issue of disallowance of INR 25,20,300 for sales promotion expenses, including a significant amount paid to a specific party. The tribunal directed the AO to restrict the disallowance to 15% of the expenditure, considering the nature of the expenses and previous assessment year's treatment of a similar issue.

Issue 3: Disallowance under section 14A read with Rule 8D
The final issue involved the disallowance of INR 2,97,198 under section 14A read with Rule 8D. The tribunal found that since no dividend income was earned by the assessee during the relevant year, the disallowance was not sustainable. Additionally, the tribunal noted that even with the amendment by the Finance Act, 2022, the disallowance under section 14A read with Rule 8D was not permissible in the present case.

In conclusion, the tribunal partly allowed the appeal by the assessee, directing the deletion of the disallowances under all three issues raised in the appeal.