2017 (12) TMI 1398 - AT - Income Tax

Addition on account of expenses not related to the business - Held that - Commissioner of Income Tax (Appeals) has given valid and cogent reasons for deleting the addition made by Assessing Officer. We concur with the same. The Assessing Officer cannot step into the shoes of assessee and dictate how much expenditure is reasonable for earning particular quantum of income. As has been rightly pointed by the First Appellate Authority the Assessing Officer has not raised any doubt over the genuineness of the expenditure. Thus, in the absence of any material on record indicating that the expenditure has been made for non-business purpose, no disallowance is warranted. Accordingly, grounds raised by the Revenue in appeal are rejected and appeal of the Revenue is dismissed. Disallowance u/s. 14A r.w.r 8D - AO while making disallowance u/s. 14A r.w.r. 8D has included the amount of share application money against which shares are yet to be allotted - Held that - Co-ordinate Bench of Tribunal in assessee‟s own case for assessment year 2009-10 has held that share application money pending allotment does not constitute part of investment for the purpose of computing disallowance u/s. 14A. Interest received on deposits belonging to the society - Held that - In assessment year 2009-10 2017 (2) TMI 1293 - ITAT PUNE the assessee demonstrated before the Tribunal that own funds of the assessee were much more than the amount advanced. The Tribunal decided the issue in favour of the assessee holding no disallowance of interest is warranted. Share application money pending allotment does not constitute part of investment for the purpose of making disallowance u/s. 14A Disallowance u/s. 14A in respect of share of profits earned from partnership firms - Held that - t is a trite law that no disallowance is to be made where investments are made for strategic purpose and no tax free income has been earned from such investments. In the instant case, the assessee has received income exempt from tax u/s. 10(2A) of the Act. Therefore, on such tax free income disallowance u/s. 14A r.w. Rule 8D(2)(iii) can be made. However, it is made clear that for computing disallowance only those investments on which exempt income has been earned shall be taken into consideration and the amount of disallowance in any case should not exceed the amount of exempt income. Suo-moto disallowance u/s. 14A made by the assessee - Held that - It is no one‟s case that investment has been made by utilizing borrowed funds. Therefore, provisions of Rule 8D(2)(ii) are not attracted. However, the provisions of Rule 8D(2)(iii) would apply in respect of tax free income earned from partnership firms. The facts in the present case are distinguishable from the facts in the immediately preceding assessment years. While deciding ground No. 2 we have upheld disallowance u/s. 14A in respect of investments made in partnership firms on which tax free income has been earned. The Assessing Officer is directed that after giving effect to ground No. 2, the balance disallowance, if any from suo-moto disallowance made by the assessee u/s. 14A be deleted. Accordingly, additional ground No. 1 raised in the appeal is partly allowed for statistical purpose. Addition of interest received on deposits belonging to the society - Held that - Assessee could not bring any material before us to show that assessee has infact handed over the money to the society. Since there is no evidence on record that any society has been formed and the assessee has transferred the money to the society or has shown any liability in its books and considering the fact that the assessee has claimed tax credit on such interest income, therefore, we find no infirmity in the order of the CIT(A) on this issue. Accordingly, the grounds raised by the assessee on this issue are dismissed Disallowance of interest expenditure u/s. 36(1)(iii) to be allowed. See The Commissioner of Income Tax Versus Reliance Utilities & Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT

Summary

Issues Involved:
1. Deletion of addition on account of expenses not related to the business.
2. Disallowance of expenses under Section 14A.
3. Addition of interest received on deposits belonging to the society.
4. Disallowance of interest expenditure under Section 36(1)(iii).

Issue-Wise Detailed Analysis:

1. Deletion of Addition on Account of Expenses Not Related to the Business:
The Revenue contended that the assessee incurred ?2,18,39,912/- on non-business expenses. The Assessing Officer (AO) disallowed this amount, arguing that the expenditure did not correlate with the income declared by the assessee. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, stating that the AO failed to prove that the expenses were not genuine or unrelated to the business. The Tribunal upheld the CIT(A)'s decision, emphasizing that the AO cannot dictate the reasonableness of business expenses without evidence of non-business purposes.

2. Disallowance of Expenses under Section 14A:
The assessee challenged the disallowance of ?2,19,04,784/- under Section 14A. The CIT(A) held that share application money should be considered for disallowance calculation. The Tribunal, referencing its previous decisions, ruled that share application money pending allotment does not constitute an investment for Section 14A disallowance. The Tribunal also noted that disallowance should only apply to investments yielding tax-free income and should not exceed the exempt income earned.

3. Addition of Interest Received on Deposits Belonging to the Society:
The assessee contested the addition of ?10,13,878/- as interest income from deposits meant for the society. The Tribunal, following its earlier ruling, dismissed the assessee's claim, stating that there was no evidence of the money being transferred to the society or any liability shown in the books.

4. Disallowance of Interest Expenditure under Section 36(1)(iii):
The assessee argued against the disallowance of ?5,34,01,201/- under Section 36(1)(iii), asserting that it had sufficient interest-free funds to cover advances made to sister concerns. The Tribunal, citing the assessee's balance sheet and previous rulings, agreed that the assessee's own funds exceeded the advances, thus no interest disallowance was warranted. The Tribunal directed the AO to delete the disallowance.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, providing relief on the issues of Section 14A disallowance and interest expenditure under Section 36(1)(iii), while upholding the addition of interest received on society deposits.