2016 (3) TMI 142 - AT - Income Tax

Disallowance u/s 14A - Held that - DR has not controverted the fact that the assessee has not received any exempted income during the year under consideration. In view of the judgment of the Hon ble Jurisdictional High Court in the case of Cheminvest Ltd Vs. CIT 2015 (9) TMI 238 - DELHI HIGH COURT and in the case of CIT Vs. Holcim India Pvt Ltd 2014 (9) TMI 434 Del wherein it has been held that no disallowance u/s 14A of the Act can be made in a year in which no exempt income has been earned or received by the assessee, we concur with the ld. AR submissions. We also agree with the contention of the ld. AR that without establishing any nexus between the expenditure incurred and investment, Rule 8D cannot be invoked. - Decided in favour of assessee Disallowance of interest - Held that - We note that the interest free advances given to six companies during F.Y. 2006-07 pertained to A.Y 2007-08. When the assessee s company established that no interest bearing funds were utilised for these impugned interest free advances, then disallowance can be held as sustainable. When the CIT(A) himself has recorded a finding of fact at Pg 8/9 of the order that amounts advanced to six companies was out of internal accruals/ redemption of Mutual Funds and not out of Borrowed funds, we do not find any valid reason to interfere with his finding in the absence of any material brought on record by the ld. DR to contradict the same. - Decided in favour of assessee

Summary

Issues:
1. Disallowance of interest paid to sister concerns.
2. Disallowance under Rule 8D for not earning exempt income.
3. Disallowance of interest on interest-free loans.

Issue 1: Disallowance of interest paid to sister concerns:
The Revenue appealed against the deletion of interest disallowance amounting to Rs. 48,49,411 related to funds advanced to sister concerns. The auditors highlighted that the interest rate was prejudicial to the company's interest. However, the CIT(A) deleted the disallowance. The Tribunal noted that the company did not earn any exempted income during the relevant year. Citing legal precedents, the Tribunal upheld the assessee's contentions and dismissed the Revenue's grounds.

Issue 2: Disallowance under Rule 8D for not earning exempt income:
The assessee contested the applicability of Rule 8D for disallowance amounting to Rs. 10,03,955 despite not earning any exempt income. The Tribunal agreed with the assessee, citing judgments that disallowance under Section 14A cannot be made if no exempt income is earned. The Tribunal dismissed the Revenue's grounds and allowed the assessee's cross objections.

Issue 3: Disallowance of interest on interest-free loans:
The Revenue challenged the deletion of disallowance of interest on interest-free loans advanced to sister concerns. The Tribunal examined the source of funds and found that the interest-free advances were made from internal accruals and not borrowed funds. As the CIT(A) also confirmed this fact, the Tribunal upheld the deletion of disallowance. The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross objection.

In conclusion, the Tribunal dismissed the Revenue's appeal while allowing the assessee's cross objection. The judgments focused on disallowances related to interest payments, applicability of Rule 8D without exempt income, and interest on interest-free loans, providing detailed analysis and legal reasoning for each issue.