2018 (1) TMI 782 - AT - Income Tax

Disallowance made under section 14A r/w rule 8D - Held that - The assessee s submissions before the Departmental Authorities was restricted to the additional disallowance proposed and made by the Assessing Officer under section 14A r/w rule 8D. The issue as raised by the assessee before us to the effect that the suo motu disallowance made by the assessee even has to be deleted is a completely new issue raised for the first time before us. Therefore, for the purpose of giving a fair opportunity to the Department to have its say on assessee s aforesaid claim, we restore the matter back to the file of the Assessing Officer for adjudication. Disallowance of interest expenditure under section 36(1)(iii) / section 57(iii) - Commissioner (Appeals) disallowed 6% out of interest expenditure incurred by the assessee only on the reasoning that while the assessee has paid interest @ 18% on the borrowed fund it has received interest @ 12% on interest bearing advances made to the joint venture - Held that - The rate of interest at which the assessee has borrowed funds cannot be made applicable to the interest bearing advances made to the joint venture as the joint venture is constituted by the partners and the assessee apart from receiving the interest income has also a share in the distribution of the income of the joint venture. Moreover, the interest bearing advance to joint venture being made only for the purpose of business no disallowance out of interest expenditure can be made. Grounds raised by the assessee on this issue in both the appeals are allowed.

Issues:
1. Disallowance under section 14A r/w rule 8D for assessment years 2009-10 and 2010-11.
2. Netting off of interest received against interest paid under section 14A.
3. Disallowance under section 14A in respect of share income received from association of persons (AOP).
4. Part disallowance of interest expenditure under section 36(1)(iii) / section 57(iii) of the Act.

Issue 1 - Disallowance under section 14A r/w rule 8D:
The appeals by the assessee contested disallowances made under section 14A r/w rule 8D for the assessment years 2009-10 and 2010-11. The Assessing Officer disallowed amounts for both years, which the Commissioner (Appeals) partially upheld. However, it was argued that the Assessing Officer failed to record satisfaction on the correctness of the claim, as mandated by section 14A(2) and rule 8D(1). The Commissioner (Appeals) acknowledged this lapse but attempted to correct it, which was deemed impermissible. The Tribunal held that the Assessing Officer's failure to record satisfaction precluded any further disallowance under section 14A r/w rule 8D.

Issue 2 - Netting off of interest received against interest paid under section 14A:
The assessee challenged the disallowance of interest expenditure under section 14A, arguing for netting off interest received against interest paid. It was contended that no disallowance should apply to share income received from an association of persons (AOP). The Tribunal found in favor of the assessee, stating that interest rates on borrowed funds cannot be applied to interest-bearing advances made to a joint venture for business purposes, thus allowing the appeal on this issue.

Issue 3 - Disallowance under section 14A in respect of share income from AOP:
The Tribunal considered the argument that no disallowance should be made under section 14A for share income received from an AOP. The assessee contended that no exempt income was earned, and the share of loss from the joint venture should not be treated as tax-free income. The Tribunal agreed with this assertion, emphasizing that the share of profit/loss from the joint venture was already taxed at the highest rate, and thus, no further disallowance was warranted.

Issue 4 - Part disallowance of interest expenditure under section 36(1)(iii) / section 57(iii) of the Act:
The Tribunal addressed the issue of part disallowance of interest expenditure under section 36(1)(iii) / section 57(iii) of the Act. The Commissioner (Appeals) had disallowed a portion of the interest expenditure based on the interest rates on borrowed funds and interest-bearing advances. However, the Tribunal ruled in favor of the assessee, stating that interest-bearing advances made to the joint venture for business purposes did not warrant any disallowance. Consequently, the grounds raised by the assessee on this issue in both appeals were allowed.

In conclusion, the Tribunal partly allowed the assessee's appeals, overturning the disallowances made under section 14A and the part disallowance of interest expenditure. The judgment emphasized the importance of recording satisfaction by the Assessing Officer before making disallowances under section 14A and clarified that share income from an AOP should not attract disallowance under section 14A.

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