2016 (6) TMI 202 - AT - Income Tax

Disallowance made under Section 14A - Held that - When the Assessing Officer has not expressed or recorded any satisfaction by identifying the expenditure which has been incurred by the assessee for earning the dividend income the disallowance under Section 14A on account of indirect expenditure is not sustainable and the same is disallowed. Disallowance of interest in respect of work-in-progress - Held that - In view of the contention of the learned Authorised Representative that the assessee is having its own fund sufficient for the expenditure incurred being part of the work-in-progress, we are of the considered opinion that this is a factual aspect of the matter and requires a proper examination and verification. Accordingly, we set aside this issue to the record of the Assessing Officer for limited purpose of verification of availability of non-interest bearing fund with the assessee and thereafter the Assessing Officer has to adjudicate the issue in accordance with the above observations. Disallowance of interest on account of interest free advances given to related parties - Held that - The assessee was having its own fund which was sufficient for this additional investment in the sister concern. Therefore, we do not find any error or illegality in the order of CIT (Appeals) in deleting the disallowance made by the Assessing Officer on account of interest expenditure under Section 14A. Disallowance of interest in respect of capitalization of work-in-progress - Held that - It clear from the finding of the CIT (Appeals) that the interest rate of 11% as calculated by considering all the relevant amounts of loan and interest. Therefore, in the absence of any contrary fact brought before us, we do not find any reason to interfere with the finding of the CIT (Appeals) on this issue.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Capitalization of interest in respect of work-in-progress.
3. Deletion of disallowance of interest expenditure under Section 14A by CIT (Appeals).
4. Disallowance of interest on account of interest-free advances given to related parties.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:
The assessee contested the disallowance made under Section 14A read with Rule 8D of the Income Tax Rules, 1962. The Tribunal noted that the Assessing Officer (AO) did not express any satisfaction that the assessee incurred expenditure for earning exempt income. The AO applied Rule 8D(2)(iii) without proper ascertainment of indirect expenditure. The Tribunal referenced a co-ordinate bench decision in the assessee's own case for earlier years, which held that without identifying and ascertaining the expenditure attributable to exempt income, the disallowance under Rule 8D(2)(iii) is not sustainable. Consequently, the Tribunal deleted the disallowance made by the AO.

2. Capitalization of Interest in Respect of Work-in-Progress:
The assessee argued against the capitalization of interest related to work-in-progress. The Tribunal referred to its earlier decision for the Assessment Year 2010-11, which held that interest expenditure on borrowed funds used for business expansion must be capitalized as per the proviso to Section 36(1)(iii). However, the Tribunal remanded the issue to the AO for verification of the availability of non-interest-bearing funds with the assessee, which could justify the deletion of the disallowance.

3. Deletion of Disallowance of Interest Expenditure under Section 14A by CIT (Appeals):
The revenue appealed against the CIT (Appeals) decision to delete the disallowance of ?33,95,068 under Section 14A. The Tribunal upheld the CIT (Appeals) decision, noting that the assessee had sufficient interest-free funds and no fresh investments were made during the relevant year. The interest expenses were related to specific loans for specific purposes, and there was no evidence that borrowed funds were used for tax-free investments.

4. Disallowance of Interest on Account of Interest-Free Advances Given to Related Parties:
The AO disallowed interest expenditure, assuming that interest-bearing funds were diverted to interest-free advances to sister concerns. The CIT (Appeals) deleted this disallowance, noting that the assessee had sufficient interest-free funds to cover the advances. The Tribunal upheld the CIT (Appeals) decision, referencing its earlier decision for the Assessment Year 2007-08, where it was established that the assessee had sufficient interest-free funds. The Tribunal found no reason to interfere with the CIT (Appeals) finding that the assessee's interest-free funds were sufficient to cover the advances.

Separate Judgments Delivered:
None mentioned.

Conclusion:
The Tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal, providing detailed reasoning for each issue based on previous decisions and the specific facts of the case. The Tribunal emphasized the importance of proper satisfaction and identification of expenditure by the AO before making disallowances under Section 14A and upheld the principle that interest on borrowed funds used for business expansion must be capitalized.