2012 (9) TMI 754 - AT - Income Tax

Disallowance of interest expense in relation to advance given to sister concern - Assessee has not charged any interest on its advance to a 100% subsidiary and to a group company Assessee contended that such amount was given in the ordinary course of the business Subsidiary company have no other business and only having land on which construction is not permissible No increase in share capital & reserves but secured loan has been raised - Held that - As concluded from the facts of case the interest free funds available with the assessee are far more than the interest free advances. Interest free advance granted by the assessee to the subsidiary company was less than cash profit generated by the assessee. Therefore, it should be presumed that the subsidiaries were paid out of the profit of the assessee which is far in excess of the amount paid to the subsidiaries. Decision in favour of assessee Disallowance of employees contribution to P.F Assessee contended that these payments have been made within the due date of filing of return u/s. 139(1) Held that - As the dates provided by assessee are not available in either of the orders of the authorities below. Therefore for verification issue remand back to AO. Disallowance of prior period expenses Assessee argued that said expenditure related to the electricity charge Held that - Only expenditure which is related to the accounting year under consideration has to be allowed against the declared receipts except the expenditure which was not crystallized in earlier accounting years. Further assessee has failed to prove that the expenditure in question was crystallized only in the accounting year. Appeal decides in favour of revenue Depreciation on Hotel building Assessee claim depreciation on hotel building claimed by assessee at 15% - AO allow 10% - Held that - As decided in earlier years by CIT(A)that depreciation for hotel building will be allowable only @ 10%. Appeal decided in favour of revenue Ad-hoc disallowance of interest expenses against dividend income u/s 14A Held that - The AO must adopt reasonable basis for effecting the apportionment with reasonable opportunity of being heard provide to assessee. Disallowance should be restricted to 1% of dividend income. Therefore, earning exempt dividend income should be restricted to 1% of dividend income. Decision in favour of assessee

Issues Involved:
1. Justification of CIT(A) in confirming the disallowance of interest on borrowed funds.
2. Commercial expediency of funds used by sister concerns.
3. Disallowance of employees' contribution to P.F.
4. Disallowance of prior period expenses.
5. Depreciation rate on hotel buildings.
6. Disallowance of interest expenses under section 14A.

Issue-wise Detailed Analysis:

1. Justification of CIT(A) in Confirming the Disallowance of Interest on Borrowed Funds:
The primary issue was whether the CIT(A) was justified in confirming the disallowance of interest on borrowed funds on the grounds that the assessee's own funds were not sufficient to advance the same to sister concerns. The Tribunal noted that the assessee had substantial interest-free funds in the form of share capital and reserves, which were more than the interest-free advances given to the subsidiaries. The Tribunal relied on the Bombay High Court's decision in CIT Vs Reliance Utilities and Power Ltd (313 ITR 340), which established that if interest-free funds are available to an assessee sufficient to meet its investments, it can be presumed that the investments were from the interest-free funds available. Consequently, the Tribunal held that the CIT(A) was in error in holding that the interest-free funds available to the assessee were not sufficient to advance interest-free advances to the sister concerns.

2. Commercial Expediency of Funds Used by Sister Concerns:
The second issue was whether the CIT(A) was justified in confirming the action of the AO by stating that the funds used by the sister concerns were not for commercial expediency. The Tribunal found that there were no findings by the CIT(A) about the commercial expediency of advancing interest-free advances to the sister concerns. The Tribunal emphasized that the advances given to the subsidiary company were for the purposes of business and that when an assessee gives an interest-free advance to a wholly-owned subsidiary for its business purposes, it is ordinarily considered commercially expedient. The Tribunal referred to the Supreme Court's decision in S A Builders Vs CIT (288 ITR 1), which held that what is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency.

3. Disallowance of Employees' Contribution to P.F:
The issue involved the disallowance of employees' contribution to P.F. under section 2(24)(x) read with section 36(1)(va) of the Act. The Tribunal remitted the matter back to the Assessing Officer to verify whether the payments were made within the due date of filing the return of income under section 139(1) of the Act. If the payments were made within the due date, the addition should be deleted in full.

4. Disallowance of Prior Period Expenses:
The issue involved the disallowance of prior period expenses on account of interest related to previous financial years. The Tribunal noted that the assessee's counsel conceded that the expenditure related to receipts for accounting years 2003-04 and 2004-05 and not to the relevant assessment year 2007-08. Consequently, the Tribunal dismissed this issue of the assessee's appeal.

5. Depreciation Rate on Hotel Buildings:
The issue involved the disallowance of depreciation on hotel buildings claimed by the assessee at 15% and allowed by the Assessing Officer at 10%. The Tribunal found that this issue was covered against the assessee in earlier years and that the CIT(A) had decided on that basis. The Tribunal upheld the CIT(A)'s decision to allow depreciation at 10%.

6. Disallowance of Interest Expenses Under Section 14A:
The issue involved the disallowance of interest expenses by invoking the provisions of section 14A of the Act read with Rule 8D(2)(ii) of the I.T. Rules, 1962. The Tribunal noted that the applicability of Rule 8D is prospective and applicable from the assessment year 2008-09. For the current assessment year, the Tribunal directed the AO to determine the expenditure incurred in relation to income that does not form part of the total income under the Act on a reasonable basis. The Tribunal restricted the disallowance to 1% of the expenses.

Conclusion:
The Tribunal allowed the assessee's claim regarding the disallowance of interest on borrowed funds and the commercial expediency of funds used by sister concerns. The matter of employees' contribution to P.F. was remitted back to the AO for verification. The disallowance of prior period expenses and the depreciation rate on hotel buildings were upheld. The disallowance of interest expenses under section 14A was restricted to 1% of the expenses. The appeal was partly allowed in favor of the assessee.

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