2018 (3) TMI 953 - AT - Income Tax

Interest allowance as revenue expenditure related to the business purpose - AO disallowed the interest payment on unsecured loan on the ground that the assessee diverted ₹ 36.76 cr. for non business purposes out of the borrowed funds - Held that - It is necessary to determine the actual fact whether lending of monies and the investments in subsidiaries, associate companies, partnership firm as tabulated in page 6 of the assessment order and page 9 of CIT(A) s order are part and parcel of business activity of the assessee. This factual finding would be necessary to determine the fact of utilisation of borrowed funds for the business purposes which will in turn be essential to determine the allowability of interest u/s. 36(1)(iii). Hence, in the fitness of things we deem it appropriate to remand this issue to the file of the AO to address this issue in the light of directions given above. Accordingly, revenue s ground of appeal is allowed for statistical purposes. Disallowance u/s. 14A applying rule 8D(2)(iii) of the Rules taking the average investment as ₹ 2.485 cr. - Held that - Assessee had made investment and issued debentures to the tune of ₹ 8.41 cr., the return of which would be in the form of interest which is taxable. Hence, we are inclined to accept the argument of the Ld. AR that the same should be excluded while calculating disallowance u/s. 14A read with Rule 8D of the Rules. Similarly, in respect of investment made in the capital of a partnership firm, the assessee has earned taxable interest of ₹ 41,16,090/- and accordingly, the said investment also would be outside the purview of sec. 14A read with Rule 8D of the Rules and therefore, we direct both these amounts should be excluded while 8D(2)(iii) investment is computed. Coming back to computation of Rule 8D(2)(iii) of the Rules. This Tribunal has consistently followed the dictum of law laid down in REI Agro Ltd. Vs. DCIT 2013 (9) TMI 156 - ITAT KOLKATA in which the Tribunal held that only investment which has given rise to the exempted income should be taken into consideration while computing disallowance u/s. 14A read with Rule 8D. This order has been upheld by the Hon ble High Court vide judgment 2013 (12) TMI 1517 - CALCUTTA HIGH COURT . Respectfully following the same, we direct the AO to re-compute the disallowance as above mentioned.

Summary

Issues:
1. Disallowance of interest payment on unsecured loan by AO.
2. Appeal against Ld. CIT(A)'s decision to allow the interest as revenue expenditure.
3. Disallowance u/s. 14A of the Act by AO and Cross Objection by assessee.

Analysis:
1. The revenue appealed against Ld. CIT(A)'s decision to allow interest amounting to ?1,77,54,031 as revenue expenditure related to business purpose. AO disallowed interest payment on unsecured loan, alleging diversion of funds for non-business purposes. Ld. CIT(A) held that all investments were for business purposes, deleting the disallowance. Tribunal noted discrepancies in AO's findings and remanded the issue for factual determination of fund utilization.

2. Tribunal observed that Ld. CIT(A) erred in finding income offered by the assessee in P&L Account, as real estate segment income was not recognized. The Tribunal directed a factual finding on fund utilization for business purposes. The accounting policies indicated no revenue recognition for construction work in progress, contradicting Ld. CIT(A)'s decision. The Tribunal remanded the issue to AO for clarification.

3. Regarding disallowance u/s. 14A of the Act, the assessee's Cross Objection challenged the computation under Rule 8D(2)(iii). The Tribunal excluded certain investments from the computation, following the precedent set in REI Agro Ltd. Vs. DCIT, directing the AO to re-compute the disallowance. The appeal of the revenue was allowed for statistical purposes, and the cross objection of the assessee was partly allowed for statistical purposes.

This comprehensive analysis covers the issues raised in the legal judgment, detailing the arguments, findings, and directions given by the Tribunal for each issue involved.