2018 (3) TMI 810 - AT - Income Tax

Disallowance of interest - Held that - No disallowance of interest can be made merely because advance was given at a lower rate of interest or without charging any interest to the wholly owned subsidiaries. In the instant case before us, advance was given to the wholly owned subsidiaries at an interest rate of 9%. No infirmity in the order of CIT(A) for deleting the disallowance of interest so made by the AO. Disallowance u/s. 14A r.w.R. 8D(2)(iii) - Held that - Since the assessee s own funds were more than the investment no disallowance of interest is warranted under Rule 8D2(ii) of the IT Act. Accordingly, there is no infirmity in the order of CIT(A) for deleting the disallowance of interest u/s.14A. No merit for the disallowance of corporate membership fees paid to be treated as revenue expenditure incurred for business purposes. Disallowance made by AO under Rule 8D(2)(iii) - Held that - Restore the matter back to the file of AO and direct the AO to recompute the disallowance after excluding the investment on which no exempt income has been earned as well as investment in subsidiary companies. Reopening of assessment - allowing setting of speculation loss from trading in shares out of income from trading in commodities - Held that - Since assessee was trading at un-recognised stock exchange, therefore, income arising out of trading of commodities at such unrecognized stock exchange also amounts to speculation income, therefore, there is nothing wrong for allowing set off speculation loss against speculation income and for carry forward of unabsorbed speculative loss to be set off against the future speculation income. The AO has not disproved that the commodity trading income was not out of unrecognized commodity exchange market and as long as when the assessee earned out of unrecognized commodity exchange, the income or loss out of transaction on such unrecognized exchange will remain speculative in nature- the amendment in Sec 43(5)(d) was only to provide benefit to the assessees to treat their losses as non speculative only when such losses were incurred while trading on any recognized stock exchange and not otherwise. In view of decision of Bharat Ruia 2011 (4) TMI 37 - BOMBAY HIGH COURT the assessee has correctly set off speculation loss on shares against speculative income from trading in commodity and carried forward the unabsorbed speculative loss to the subsequent year to be set of against speculative income. - Decided in favour of assessee.

Issues Involved:
1. Disallowance of interest u/s 36(1)(iii) of the IT Act.
2. Disallowance of interest under Rule 8D(2)(ii) of the IT Act.
3. Disallowance u/s 14A r.w. Rule 8D(2)(iii).
4. Treatment of income from commodity trading as speculative or non-speculative.
5. Disallowance of corporate membership fees.

Detailed Analysis:

1. Disallowance of Interest u/s 36(1)(iii) of the IT Act:
The primary issue was whether the differential interest on loans given to subsidiary companies should be disallowed. The AO disallowed the interest, arguing that the loans to subsidiaries were at a lower interest rate than the borrowings from Lehman Brothers, making the transaction non-commercial. The CIT(A) deleted the disallowance, citing judicial precedents like S.A. Builders Ltd. v CIT and CIT v Dalmia Cement Bharat Ltd., which support the deduction of interest even if the loans to subsidiaries are at a lower rate, provided the subsidiaries are engaged in business activities. The Tribunal upheld the CIT(A)'s decision, emphasizing that the interest expenditure cannot be disallowed merely because the advance was given at a lower rate of interest.

2. Disallowance of Interest under Rule 8D(2)(ii) of the IT Act:
The AO made disallowances under Rule 8D(2)(ii) for interest expenses, assuming that investments in tax-free securities were made from a common pool of funds. The CIT(A) deleted these disallowances, noting that the assessee's own funds were sufficient to cover the investments, and therefore, the borrowed funds were used for business purposes. The Tribunal agreed, citing the principle established in Reliance Utilities and Power Ltd., which presumes that investments are made from own funds if they exceed the borrowed funds.

3. Disallowance u/s 14A r.w. Rule 8D(2)(iii):
The AO computed disallowance under Rule 8D(2)(iii) for expenses related to earning exempt income. The CIT(A) and the Tribunal found that the AO's method was incorrect and directed the AO to recompute the disallowance, excluding investments that did not yield exempt income and investments in subsidiary companies. The Tribunal also noted that the assessee's own funds were more than the investments, thus no disallowance was warranted under Rule 8D(2)(ii).

4. Treatment of Income from Commodity Trading as Speculative or Non-Speculative:
The AO treated the income from commodity trading on unrecognized exchanges as non-speculative, disallowing the set-off of speculative losses from share trading. The CIT(A) reversed this, stating that since the trading was on unrecognized exchanges, it should be considered speculative. The Tribunal upheld the CIT(A)'s decision, referencing judicial precedents like Bharat Ruia and DLF Commercials, which support treating such income as speculative and allowing the set-off of speculative losses.

5. Disallowance of Corporate Membership Fees:
The AO disallowed the corporate membership fees paid to Bombay Gymkhana, treating it as non-business expenditure. The CIT(A) allowed the deduction, supported by several judicial decisions such as CIT vs United Glass Manufacturing Company and Capgemini Business Services (India) Ltd., which recognize such fees as revenue expenditure incurred for business purposes. The Tribunal upheld the CIT(A)'s decision.

Conclusion:
The Tribunal consistently upheld the CIT(A)'s decisions across various issues, emphasizing the principles laid down in relevant judicial precedents. The disallowances made by the AO were largely deleted, and the Tribunal directed the AO to recompute certain disallowances in line with the proper legal framework and judicial guidelines. The appeals of the Revenue were dismissed, while the appeals of the assessee were allowed in part.

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