2016 (5) TMI 700 - AT - Income Tax

Disallowance u/s 14A - Held that - We have observed that Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT ) has held that Rule 8D of Income Tax Rules, 1962 is applicable only from the assessment year 2008-09 , while the relevant assessment year under appeal is 2006-07. Section u/s 14A of the Act is applicable for the relevant assessment year and the disallowance has to be made in respect of the income which does not from part of the total income . The assessee company has mixed pool of funds which are deployed for earning the taxable income and tax free income and it is for the assessee company to show with the cogent material/evidences that interest free funds are deployed in making investments which yield tax free income . In our considered view , the interest of justice will be best served if the matter is restored to the file of the AO for de-novo determination of the issue with the directions to the assessee company to produce on record cogent material/evidences to substantiate its claim that the interest free own funds are deployed for making the investments which yield tax free income and then accordingly the disallowance be worked out . The AO shall also keep in view the presumption as laid down by Hon ble Bombay High Court in the case of HDFC Bank Limited (2014 (8) TMI 119 - BOMBAY HIGH COURT ) and also other case laws relied upon by the assessee company while de-novo determination of the issue. Needless to say that the AO shall grant proper and adequate opportunity of hearing to the assessee company in accordance with law in compliance with principles of natural justice. We order accordingly. Delayed payments in respect of Employees Contribution towards PF and ESIC - Held that - We have observed that the assessee company has made payments towards Employee s PF contribution beyond the time stipulated i.e. due date under the relevant PF Act but however the assessee company has made the afore-stated payments of PF before the due date of filing of return of income u/s 139(1) of the Act. We have observed that this issue is squarely covered by the decision of Hon ble Bombay High Court in Ghatge Patil Transport Ltd 2014 (10) TMI 402 - BOMBAY HIGH COURT and also Hon ble Supreme Court in Alom Extrusions Ltd. 2009 (11) TMI 27 - SUPREME COURT in favour of the assessee company and hence the deduction is allowable with the respect to employee contribution towards PF if payment although made beyond the due date as prescribed under the PF Act but are made before the due date of filing of return of income u/s 139(1) of the Act which shall be treated as in compliance with Section 36(1)(va) of the Act read with Section 43B of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of interest on alleged interest-free loans.
2. Disallowance under Section 14A of the Income Tax Act.
3. Disallowance of payment to Employees' Contribution to Provident Fund.

Issue-wise Detailed Analysis:

1. Disallowance of Interest on Alleged Interest-Free Loans:

The assessee company contested the disallowance of Rs. 8,39,411/- interest calculated at 9% on alleged interest-free loans given to various parties, arguing these were business advances. The Assessing Officer (AO) disallowed the interest, stating the assessee failed to provide documentary evidence proving the advances were for business purposes, thus invoking Section 36(1)(iii) of the Income Tax Act. The CIT(A) upheld this disallowance, noting the assessee's failure to substantiate its claim with evidence.

The Tribunal, however, noted that in the preceding assessment years (2004-05 and 2005-06), similar advances were accepted as business advances by the Tribunal. The assessee also had sufficient interest-free funds. The Tribunal directed the AO to re-examine the issue, allowing the assessee to provide evidence that the advances were for business purposes, considering past Tribunal decisions and relevant case laws.

2. Disallowance under Section 14A of the Income Tax Act:

The AO disallowed Rs. 11,82,953/- under Section 14A read with Rule 8D, claiming the assessee did not allocate any expenditure for earning exempt income (dividend and long-term capital gains). The CIT(A) partially upheld this, confirming Rs. 8,28,781/- under Rule 8D(2)(ii) but reducing the disallowance under Rule 8D(2)(iii) by 50%.

The Tribunal noted that Rule 8D is applicable from the assessment year 2008-09, while the relevant year is 2006-07. The Tribunal directed the AO to re-examine the issue, allowing the assessee to produce evidence showing interest-free funds were used for investments yielding tax-free income, considering relevant case laws and the presumption laid down by the Hon'ble Bombay High Court in HDFC Bank Limited.

3. Disallowance of Payment to Employees' Contribution to Provident Fund:

The AO disallowed Rs. 86,358/- for delayed payments towards Employees' Contribution to PF, beyond the due date under the PF Act but before the due date of filing the return under Section 139(1) of the Income Tax Act. The CIT(A) confirmed this disallowance as the assessee did not file any submission in this regard.

The Tribunal, referencing the Hon'ble Bombay High Court decision in Ghatge Patil Transports Ltd. and the Hon'ble Supreme Court decision in Alom Extrusions Ltd., held that the payments made before the due date of filing the return should be allowed as deductions. Thus, the Tribunal ordered the deletion of the disallowance of Rs. 86,358/-.

Conclusion:

The Tribunal partly allowed the appeal, directing the AO to re-examine the disallowance of interest on alleged interest-free loans and the disallowance under Section 14A, while deleting the disallowance of the Employees' Contribution to Provident Fund. The Tribunal emphasized the need for the AO to provide the assessee with a proper opportunity to present evidence and comply with the principles of natural justice.