2015 (1) TMI 909 - AT - Income Tax

Disallowance of interest - inter corporate deposits - assessee company was engaged in the business of financing and investment activities - Held that - In the present case it is an admitted fact that the assessee was a Non-Banking Financial Company and its Memorandum of Association and Articles of Association authorized it to do the business of Financing and Investment. The assessee in the preceding year received unsecured loans of 5, 50, 00, 000/- which were initially utilized for giving Inter Corporate Deposits. In the instant case it is an admitted fact that the AO allowed the claim of the assessee regarding interest on borrowed capital in the preceding year i.e. the assessment year 2006-07 and there is no change in the facts for the year under consideration vis- -vis the preceding year moreover the loan received in the year under consideration was utilized for making the repayment of the old loans. Therefore no disallowance was called for in the year under consideration even by keeping view the principles of consistency. In the present case also the assessee made the investment in share application money for a sum of 4, 25, 00, 000/- whereas the Share Capital alongwith Reserve 5, 60, 39, 195/-(Rs. 2, 25, 00, 000/- 3, 65, 39, 195/-) which clearly established that interest-free funds available with the assessee were more than the investments made in share application money. Therefore the disallowance made by the AO on account of notional interest was not justified and the ld. CIT(A) arbitrarily confirmed the same. We therefore delete the disallowance made by the AO and sustained by the ld. CIT(A). - Decided in favour of assessee.

Issues Involved:
1. Disallowance of interest expenses amounting to Rs. 42,50,000.
2. Applicability of Section 14A of the Income Tax Act.
3. Charging of interest under Section 234B of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Interest Expenses:
The primary issue in this appeal was the disallowance of Rs. 42,50,000 made by the Assessing Officer (AO) on account of interest expenses. The AO observed that the assessee had borrowed funds and paid interest, but invested a significant portion of these funds as share application money in M/s Sarvesh Coal Tech Pvt. Ltd., which was not connected to the assessee's business and did not generate any income. The AO concluded that the borrowed money was diverted for non-business purposes and calculated a notional interest of 10% on Rs. 4,25,00,000, adding the same to the income of the assessee.

The assessee contended that it was a Non-Banking Financial Company (NBFC) engaged in financing and investment activities, authorized by its Memorandum of Association. The assessee argued that the funds borrowed were used for business purposes, including the advancement of share application money, which was within its business activities. The assessee also highlighted that the unsecured loans were received in the preceding year and utilized for business activities, and no disallowance was made in that year.

The Tribunal observed that the assessee had sufficient interest-free funds (Share Capital and Reserves & Surplus) amounting to Rs. 5,90,39,195, which exceeded the share application money of Rs. 4,25,00,000. Therefore, the interest-free funds were sufficient to cover the investment, and there was no nexus between the interest-bearing funds and the non-business investment. The Tribunal relied on the principle established in CIT Vs Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom.) that if interest-free funds are sufficient to meet the investments, it can be presumed that the investments were made from interest-free funds. Consequently, the disallowance made by the AO was not justified and was deleted.

2. Applicability of Section 14A:
The AO and the CIT(A) held that the interest expenses could not be allowed as a deduction under Section 36(1)(iii) or Section 37 of the Income Tax Act, and even if allowed, it would be hit by the provisions of Section 14A, as the income from shares (dividend) does not form part of the total income.

The Tribunal noted that the provisions of Rule 8D of the Income Tax Rules, 1962, were not applicable for the assessment year 2007-08, as they were inserted w.e.f. the assessment year 2008-09. Moreover, since the assessee had sufficient interest-free funds to cover the investment, the disallowance under Section 14A was not warranted.

3. Charging of Interest under Section 234B:
The assessee contended that the interest under Section 234B was wrongly charged as the additions made were not foreseeable, and therefore, there was no default in advance tax payment. The Tribunal held that the issue of charging interest under Section 234B was consequential in nature and directed accordingly.

Conclusion:
The appeal of the assessee was allowed. The disallowance of Rs. 42,50,000 on account of interest expenses was deleted, and the applicability of Section 14A was negated due to the sufficiency of interest-free funds. The issue of charging interest under Section 234B was deemed consequential.

← Previous Next →