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2016 (5) TMI 1218 - AT - Income TaxDisallowance u/s 36 (1) (iii) - interest on loan - Held that - Assessee had advanced the loans during the normal course of business and therefore interest expenditure was allowable as per the provisions of section 36 (1) (iii)of the Act. The AO has not brought on record anything to prove that expenditure incurred under the head interest was not wholly and exclusively for carrying out the business of the assessee for the year under consideration. Therefore, confirming the order of the FAA, we dismiss the second ground, raised by the AO. - Decided in favour of assessee Disallowance made u/s. 14A - Held that - In absence of any exempt income no disallowance could be made u/s. 14A of the Act. Considering the facts-like availability of sufficient own funds, non-receipt of exempt income during the year, and strategic investment in the sister concerns we hold that the FAA was not justified in upholding the disallowance. - Decided in favour of assessee Valuation loss treated as speculation loss - Held that - We find that the assessee had shown interest income of ₹ 23. 78 crores. That in the MOA the main object of the company has been mentioned as financing. As per the settled principle of taxation jurisprudence section 73 is not applicable if the assessee is engaged in Finance business. Thus provisions of section 73 r. w. explanation was not applicable. Therefore reversing the order of the FAA, we decide the effective Ground of appeal in favour of the assessee.
Issues Involved:
1. Deletion of addition made under Section 36(1)(iii) of the Income Tax Act. 2. Deletion of disallowance made under Section 37(1) of the Income Tax Act. 3. Disallowance under Section 14A of the Income Tax Act. 4. Treatment of valuation loss as speculation loss under Section 73 of the Income Tax Act. Issue-Wise Detailed Analysis: 1. Deletion of Addition Made Under Section 36(1)(iii): The AO found that the assessee had shown significant interest expenditure and made investments in shares without resulting in any income. The AO disallowed ?50 lakhs on account of interest attributable to share application money in shares of Sun City Projects Ltd. The FAA deleted this disallowance, noting that the AO's basis was flawed as no scrutiny assessment had taken place for the AY 2007-08. The FAA concluded that the interest expenditure incurred for earning income had to be allowed under Section 36(1)(iii). The Tribunal upheld the FAA's order, confirming that the AO's disallowance lacked legal or factual basis. 2. Deletion of Disallowance Made Under Section 37(1): The AO disallowed ?3.05 crores as notional interest on loans advanced to related concerns without charging interest, arguing that the assessee failed to prove business expediency. The FAA allowed the appeal, stating that the interest expenses on NPA loans were incurred wholly and exclusively for the finance business and were allowable under Section 36(1)(iii). The Tribunal agreed, noting that NBFCs are not required to credit interest income on accrual basis per RBI guidelines, and the AO did not prove that the interest expenditure was not for business purposes. 3. Disallowance Under Section 14A: The AO disallowed ?2.21 crores under the head interest expenditure and ?12.15 lakhs out of administrative expenses, arguing that the assessee had made significant investments in shares and claimed exemption for dividend income. The FAA upheld the AO's order, stating that the assessee had not provided evidence to prove the exact nexus between own funds and investments. The Tribunal reversed the FAA's order, noting that the assessee had sufficient own funds, had not received exempt income during the year, and had made strategic investments in sister concerns. Therefore, no disallowance could be made under Section 14A in the absence of exempt income. 4. Treatment of Valuation Loss as Speculation Loss Under Section 73: The AO treated the diminution in the value of closing stock of shares as speculation loss, to be carried forward as speculation business loss. The FAA upheld the AO's order. The Tribunal reversed the FAA's order, stating that the assessee was engaged in the business of financing and advancing loans, and as per the settled principle of taxation jurisprudence, Section 73 is not applicable to companies engaged in finance business. The Tribunal cited the Hon’ble Madras High Court's judgment in Ashley Service Ltd., which excluded companies whose principal business is banking or financing from the provisions of Section 73. Conclusion: The appeals filed by the AO for both assessment years were dismissed, and the appeals of the assessee for both assessment years were allowed. The Tribunal confirmed the FAA's deletion of disallowances under Sections 36(1)(iii) and 37(1), reversed the FAA's upholding of disallowance under Section 14A, and ruled that the valuation loss should not be treated as speculation loss under Section 73.
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