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2016 (5) TMI 933 - AT - Income TaxDisallowance of proportionate interest under section 36(1)(iii) - Held that - In any case the assessee had enough interest free funds to make impugned advances and therefore it was to be presumed that the advances had been made out of interest free funds and no disallowance under section 36(1)(iii) was therefore warranted in this case. In view of the above we set aside the order of the Ld. CIT(A) and delete the disallowance of interest made under section 36(1)(iii) of the Act by holding that the advances had been made for business purposes and that the assessee had enough interest free funds for making the same. - Decided in favour of assessee. Disallowance made under section 14A - Held that - We do not find any infirmity in the order of the Ld. CIT(A), who deleted the disallowance made following the decision of the jurisdictional High Court in the case of Lakhani Marketing 2014 (7) TMI 44 - PUNJAB AND HARYANA HIGH COURT The argument of the Ld. DR that the CBDT Circular No. 5/2014 dt. 11/02/2014 stating that even in the absence of any exempt income disallowance under section 14A has to be made, is binding on the Revenue authority, we find has no merit. The Hon ble Supreme Court in the case of Commissioner of Central Excise, Bolpur Vs. M/s Ratan Melting & Wire Industries 2005 (2) TMI 138 - SUPREME COURT OF INDIA , has categorically held that decision of the High Court / Supreme Court would overrule Circulars issued by the Boards. - Decided in favour of assessee. Addition made on account of disallowance under section 40(a)(ia) - Held that - We do not find any infirmity in the order of the Ld. CIT(A) deleting the disallowance by holding that the impugned payment was not liable to tax deduction at source in view of section 194A(3) and thus could not be a subject matter of disallowance under section 40(a)(ia) of the Act. Undeniably the impugned payment of ₹ 64,37,342/- made by the assessee to scheduled banks for opening letters of credit was in the nature of interest as per the provisions of section 2(28A) of the Act but since the amount had been paid to scheduled banks no tax was required to be deducted at source on the same in view of the provisions of section 194A (3)(iii) which categorically exclude interest paid to banks from the perview of tax deduction at source. In view of the above since the assessee was not required to deduct tax at source in the impugned payments the provisions of section 40(a)(ia) were not applicable to the facts of the present case and Ld. CIT(A) has rightly deleted the disallowance made on this account - Decided in favour of assessee.
Issues Involved:
1. Disallowance of proportionate interest under section 36(1)(iii) of the Income Tax Act. 2. Disallowance under section 14A of the Income Tax Act. 3. Disallowance under section 40(a)(ia) of the Income Tax Act. Detailed Analysis: 1. Disallowance of Proportionate Interest under Section 36(1)(iii): The assessee company had given an interest-free advance of ?7,35,45,100 to its fully owned subsidiary, M/s Vardhman Life Sciences Private Limited. The Assessing Officer (AO) disallowed interest at 12% on this advance, amounting to ?33,92,141, under section 36(1)(iii), claiming it was not for business purposes. The assessee argued that the advance was for business purposes, specifically for manufacturing raw materials used by the assessee, which was currently imported from China at a higher cost. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's disallowance, stating that since the subsidiary had not started manufacturing, the advance was not for procuring raw materials but for starting the subsidiary's business. The CIT(A) relied on the judgment of Abhishek Industries. Upon appeal, it was held that the advance was indeed for business purposes. The Tribunal cited the Supreme Court's ruling in S.A. Builders, which stated that advances made on grounds of commercial expediency are allowable. The Tribunal concluded that the advance to the subsidiary was to benefit the assessee by ensuring cheaper and regular supply of raw materials. Additionally, it was noted that the assessee had sufficient interest-free funds to make the advance, presuming it was made from these funds. Thus, the disallowance under section 36(1)(iii) was deleted. 2. Disallowance under Section 14A: The AO made a disallowance of ?40,28,526 under section 14A read with Rule 8D, as the assessee had invested ?12,57,97,435 in its associate concern but earned no exempt income. The CIT(A) directed the AO to verify if any exempt income was earned and to delete the disallowance if none was earned, citing the jurisdictional High Court's decision in Lakhani Marketing. The Tribunal upheld the CIT(A)'s decision, rejecting the Revenue's reliance on CBDT Circular No. 5/2014, which mandates disallowance even if no exempt income is earned. The Tribunal referenced the Supreme Court's ruling in Commissioner of Central Excise vs. Ratan Melting & Wire Industries, which states that judicial decisions override circulars. Thus, in the absence of exempt income, no disallowance under section 14A was warranted. 3. Disallowance under Section 40(a)(ia): The AO disallowed ?64,37,342 under section 40(a)(ia) for non-deduction of TDS on service fees paid for availing Letter of Credit services. The assessee contended that the payment was made to scheduled banks, exempting it from TDS under section 194A(3)(iii). The CIT(A) agreed, stating that the payment to scheduled banks for opening letters of credit was in the nature of interest as per section 2(28A) and exempt from TDS under section 194A(3)(iii). The Tribunal upheld this view, confirming that no TDS was required, and thus, the disallowance under section 40(a)(ia) was not applicable. Conclusion: - The appeal of the assessee regarding the disallowance under section 36(1)(iii) was allowed. - The appeal of the Revenue regarding the disallowance under section 14A was dismissed. - The appeal of the Revenue regarding the disallowance under section 40(a)(ia) was dismissed.
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