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2017 (5) TMI 1304 - AT - Income TaxDisallowance made u/s.14A - scope of amendment - Held that - The legislature brought certain amendments and provided that no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the present case,the FAA has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that he held that disallowance u/s.14A of the Act could not be made.In the case before us,admittedly the assessee did not make any claim for exemption. In such a situation section 14A of the Act would have no application. See Cheminvest Limited Versus Commissioner of Income Tax-VI 2015 (9) TMI 238 - DELHI HIGH COURT - Decided in favour of assessee Addition u/s 36(1)(iii) - proportionate interest on borrowed funds used for acquisition of capital asset - availability of own funds - Held that - We find that the assessee had sufficient own funds and reserves to purchase new assets, that there is no evidence to prove that existing work in progress had increased because of loans taken by the assessee.The balance sheet of the assessee proves that it had sufficient fund.Therefore,respectfully following the judgment of Reliance Utilities and Power Ltd.(2009 (1) TMI 4 - BOMBAY HIGH COURT) we decide the effective ground of appeal in favour of the assessee
Issues:
1. Disallowance u/s.14A of the Act 2. Disallowance u/s.36(1)(iii) of the Act Issue 1: Disallowance u/s.14A of the Act The Assessing Officer (AO) challenged the order of the CIT(A) regarding the deletion of disallowance made u/s.14A of the Act. The AO found that the assessee had investments of &8377;253.07 crores and incurred interest and financial charges of &8377;15.18 crores. Despite the assessee's explanation that no disallowance was required as it had earned more exempt income during the year, the AO made a disallowance of &8377;13.10 crores. The First Appellate Authority (FAA) held that if there was no exempt income, no disallowance could be made u/s.14A, citing the case of Holcim India P. Limited. The Departmental Representative (DR) argued that expenses should only be allowed if relatable to taxable income, emphasizing the matching principle of accountancy. However, the AR supported the order of the FAA. The Tribunal found that the assessee did not claim any expenditure against exempt income, leading to the decision that disallowance u/s.14A could not be made, following the judgment of Cheminvest Ltd. Issue 2: Disallowance u/s.36(1)(iii) of the Act The AO directed the assessee to justify why proportionate interest on borrowed funds used for acquiring capital assets should not be disallowed u/s.36(1)(iii) of the Act. The AO observed an increase in capital work in progress, indicating business extension. The FAA confirmed the addition made by the AO, stating that interest payable on the increase had to be disallowed as per the proviso to section 36. The AR argued that the investment in work in progress was from own funds, supported by a cash flow statement. The Tribunal noted that the assessee had sufficient own funds and reserves for new assets, finding no evidence that existing work in progress increased due to loans. Following the judgment of Reliance Utilities and Power Ltd., the Tribunal decided in favor of the assessee, allowing the appeal and dismissing the AO's appeal. In conclusion, the Tribunal ruled in favor of the assessee on both issues, disallowing the challenges raised by the AO regarding disallowances u/s.14A and u/s.36(1)(iii) of the Act.
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