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2017 (4) TMI 1189 - AT - Income TaxDisallowance 14A r.w.r. 8D - Held that - The law in regard to the disallowance u/s 14A has evolved quite recently and subsequent to passing of impugned assessment order. Ld. DR was unable to prima facie rebut the issues raised by the Ld. Counsel before us. Under these circumstances, we find it appropriate to send this issue back to the file of the AO where the assessee shall be free to raise all legal and factual issues with regard to the disallowance u/s 14A and shall file requisite evidences to establish its claim, as may be required by the AO from time to time. The AO shall decide this issue afresh after considering the material and the arguments as may be brought on record by the assessee on objective basis and shall be free to decide this issue independent of the voluntary disallowance made by the assessee in the return of income. The AO would be well within his powers to assess the income below the amount offered by the assessee in the return of income, if the facts of this case and law applicable thereon so demands. Thus, with these directions, this issue is sent back to the file of the AO and may be treated as allowed, for statistical purposes. Disallowance of interest u/s 36(1)(iii) - whether there was no prudence in carrying out the activity in such a manner which culminated into incurring of net interest loss - Held that - The doubt noted by the AO with respect to incurring of loss could have at the best be it a triggering point for further investigation but that itself cannot be a conclusive ground to make disallowance in the hands of the assessee. Unfortunately, the AO failed in carrying out any investigation to contradict the transaction. In fact, it also appears to us that AO did make some verification but nothing ingenuine or wrong was noted by him. Rather, the transactions were duly substantiated. Similarly, at the stage of Ld. CIT(A) also nothing wrong or ingenuine could be brought on record by him. Under these circumstances, we find that disallowance has been made merely on the basis of whims and fancies, surmises & conjectures and doubts & suspicion made by the lower authorities. It is well settled law that a revenue officer cannot sit in the armchair of a businessman and dictate how a business is to be carried out. Thus, taking into account the totality of facts and circumstances of the case, we find that the AO had no material in his possession so as to enable him to make the impugned disallowance. Thus, the disallowance made by him on mere suspicion is not sustainable in law and therefore, it is deleted.
Issues Involved:
1. Disallowance under Section 14A 2. Disallowance under Section 36(1)(iii) Issue-wise Detailed Analysis: 1. Disallowance under Section 14A: Background: The assessee, a Non-Banking Financial Company (NBFC), filed a return for AY 2009-10, making a suo moto disallowance under Section 14A amounting to ?2.51 crores. This included ?2.49 crores on account of interest under Rule 8D(2)(ii) and ?2.25 lakhs on account of administrative expenses under Rule 8D(2)(iii). The assessee later contested this disallowance before the CIT(A), claiming it was wrongly offered in the return. However, the CIT(A) upheld the disallowance, reasoning that the assessee had initially made the disallowance in its return. Assessee’s Argument: The assessee argued that the disallowance was contrary to law for several reasons: - The investments were made for strategic reasons in group companies and should not be considered for disallowance under Section 14A. - The disallowance should not exceed the amount of dividend received. - The disallowance of interest should be on a net basis, not a gross basis. - The AO did not record proper satisfaction before making the disallowance. The assessee requested that the issue be remanded to the AO for a fresh examination. Revenue’s Argument: The Revenue opposed the assessee’s submissions, citing a Supreme Court judgment to argue that once the assessee had made a disallowance, it could not seek relief later. Tribunal’s Decision: The Tribunal noted that the objective of income-tax proceedings is to determine the taxable income and tax payable fairly and as per law. It emphasized that the assessee has the right to resile from its return if it can demonstrate that the income returned is not in accordance with law. The Tribunal found that the law regarding disallowance under Section 14A had evolved recently and the AO should re-examine the issue afresh, considering the material and arguments presented by the assessee. The issue was remanded to the AO for a fresh decision, allowing the assessee to raise all relevant legal and factual issues. 2. Disallowance under Section 36(1)(iii): Background: The AO disallowed the entire net interest of ?2,13,47,579 under Section 36(1)(iii), observing that the assessee incurred a net interest loss by borrowing at higher rates and lending at lower rates. The AO deemed this imprudent business conduct. Assessee’s Argument: The assessee contended that the transactions were genuine and strategic, necessitated by market conditions and strategic reasons. It argued that the AO had no basis to question the business prudence of the transactions, citing the Supreme Court judgment in SA Builders, which states that interest disallowance cannot be made if the borrowed amount is used for business purposes. Revenue’s Argument: The Revenue supported the AO’s view, arguing that no prudent businessman would conduct business in a manner that incurs losses. Tribunal’s Decision: The Tribunal found that the AO had not substantiated any ingenuine or wrong transactions. The loans and interest payments were verified and genuine. The Tribunal held that the AO’s disallowance was based on mere suspicion without proper investigation. It reiterated that tax authorities cannot dictate business conduct and deleted the disallowance, finding it unsustainable in law. Appeals for AY 2010-11: Assessee’s Appeal: The only issue was the disallowance under Section 14A, which was identical to the issue in AY 2009-10. Following the same reasoning, the Tribunal remanded the issue to the AO for a fresh decision. Revenue’s Appeal: The Revenue contested the deletion of disallowance under Section 36(1)(iii). The Tribunal upheld the CIT(A)’s decision, finding no reason to interfere, and dismissed the Revenue’s appeal. Conclusion: The appeals filed by the assessee for AY 2009-10 and 2010-11 were partly allowed, and the Revenue’s appeal was dismissed. The order was pronounced in the open court in the presence of representatives from both parties.
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