2015 (1) TMI 156 - AT - Income Tax

Interest of ₹ 43,78,306/- on interest bearing advances to subsidiary companies disallowed - Restriction of 5% of dividend income - Held that - Assessee has explained the availability of huge interest free funds for making the investment in subsidiary and also advances given to them on the basis of detail analysis of its fund - assessee had share capital reserve and surplus which also included cash generated from disposal of investment and issuance of furnishing equity shares which aggregated to 5968 lakhs - out of such surplus funds which are interest free the assessee has invested sum of ₹ 514,75,308 in the subsidiary - Thus, the surplus funds were sufficient to meet the advances in the investment made in the subsidiary CIT(A) has given a categorical finding that the interest bearing funds have been used for business purpose and there is a nexus between interest expenditure incurred and loan taken by the assessee the order of the CIT(A) is upheld and no disallowance of interest is called for. CIT(A) rigfhtly was of the view that in the year, disallowance u/s 14A cannot be made after applying rule 8D which is admittedly applicable from the AY 2008 09 - For the AY 2007 08, some reasonable disallowance should be made, which the CIT(A) has made 5% of the dividend income - Such a disallowance appears to be reasonable looking to the facts and circumstances of the case thus, the order of the CIT(A) is upheld. Disallowance u/s 14A while computing book profit u/s 115JB Held that - It has already been directed by the CIT(A) to be made, which is 5% of the dividend income and accordingly, such directions of the CIT(A) is upheld Decided against revenue.

Summary

Issues:
1. Disallowance of interest on advances to subsidiary companies.
2. Disallowance of dividend income under section 10(34) and section 14A.
3. Disallowance under section 14A while computing book profit under section 115JB.

Analysis:

Issue 1: Disallowance of interest on advances to subsidiary companies
The Revenue challenged the deletion of the addition made on account of disallowance of interest on interest-bearing advances to subsidiary companies. The Assessing Officer disallowed an amount of Rs. 1,61,42,479 out of the total interest claimed by apportioning interest-bearing funds for investments in subsidiaries. The Commissioner (Appeals) deleted the addition after finding that the interest-free funds were used for investments in subsidiaries for business purposes, as supported by the Supreme Court decision in S.A. Builders v/s CIT. The Tribunal confirmed the Commissioner's decision, noting that the interest-bearing funds were used for business purposes, and no disallowance of interest was warranted.

Issue 2: Disallowance of dividend income under section 10(34) and section 14A
The Assessing Officer disallowed dividend income under section 10(34) and made a further disallowance under section 14A. The Commissioner (Appeals) held that Rule 8D was not applicable for the assessment year 2007-08 and made a reasonable disallowance of 5% of the dividend income. The Tribunal affirmed the Commissioner's decision, stating that the disallowance under section 14A was reasonable given the circumstances of the case.

Issue 3: Disallowance under section 14A while computing book profit under section 115JB
The Commissioner (Appeals) directed a disallowance of 5% of the dividend income under section 14A while computing book profit under section 115JB. The Tribunal upheld this decision, confirming that the directions of the Commissioner (Appeals) were appropriate. Consequently, the Revenue's appeal was dismissed, and the Tribunal affirmed the orders of the Commissioner (Appeals) on all issues.