2018 (4) TMI 44 - AT - Income Tax

Addition u/s 36(1)(iii) - assessee has advanced the money for the purpose of its business as a measure of commercial expediency - Held that - Relying on the decision of hon ble Supreme Court in the case of SA Builders Ltd. vs CIT(A) (2006 (12) TMI 82 - SUPREME COURT) holding that the assessee has advanced money for the purpose of its business as a measure of commercial expediency. The assessee has advanced the money for the purpose of its business as a measure of commercial expediency and accordingly, the addition made by the AO in A.Y.2006-07 u/s 36(1)(iii) of the Act has been deleted. Thus, the finding of the CIT(A) in deleting the addition made by the A.O u/s 36(1)(iii) of ₹ 31,00,953/-, holding that the same cannot be sustained on the facts of the case is justified. Disallowance u/s 14A r.w.r. 8D - Held that - We find that the assessee company has invested ₹ 56.12 lacs in the shares of other companies, which are, very old; that the Paid-up capital & Free reserves of the assessee company at the end of the financial year were ₹ 17.53 crore and that the assessee claimed that no expenditure was incurred for earning the dividend. However, the AO has disallowed deemed interest expenditure of ₹ 6.10,968/- U/s 14A u/r 8D ignoring the fact about sufficient availability of own funds with the company for the purpose of investment in the shares. CIT(A) noted that AO has wrongly calculated addition u/s 14A, as total assets of the company as on 31.03.2008 were ₹ 56,17,79,311/- as against ₹ 3,66,92,065/- as considered in the assessment order which resulted in to wrong calculation of addition on this count. Accordingly, the ld. CIT(A) reduced the addition to ₹ 29,560/- as against ₹ 6,10,968/- made by the AO.The ld. DR. has not disputed the said calculation.

Summary

Issues Involved:
1. Deletion of addition made by AO under Section 36(1)(iii) of the Income Tax Act.
2. Deletion of addition made by AO under Section 14A read with Rule 8D of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Deletion of Addition under Section 36(1)(iii):
The primary issue was whether the assessee utilized borrowed funds for business purposes or for non-business purposes. The AO had disallowed ?31,00,953/- under Section 36(1)(iii), asserting that the assessee diverted interest-bearing funds to its sister concern, M/s ASB Health Care (P) Ltd., for non-business purposes.

The CIT(A) deleted this addition, referencing the ITAT Agra's decision for the A.Y. 2006-07, which concluded that the advances to the sister concern were for business purposes as a measure of commercial expediency. The CIT(A) relied on the Supreme Court's decision in S.A. Builders vs CIT(A) and noted that the facts remained consistent across the years, with the advance purpose and source unchanged. Thus, the addition of ?31,00,953/- was deleted.

The Tribunal confirmed the CIT(A)'s decision, noting that the Department had accepted this position in subsequent years and did not make similar disallowances. The Tribunal held that the CIT(A) was justified in deleting the addition, as the assessee had advanced money for business purposes.

2. Deletion of Addition under Section 14A read with Rule 8D:
The AO disallowed ?6,10,968/- under Section 14A read with Rule 8D, claiming that the assessee incurred deemed interest expenditure on investments yielding exempt income. The CIT(A) reduced this disallowance to ?29,560/-, noting that the AO had incorrectly calculated the total assets of the company.

The CIT(A) analyzed the provisions of Rule 8D and concluded that no interest-bearing funds were used for purchasing shares, and the assessee had sufficient capital and reserves. The CIT(A) relied on the ITAT Kolkata Bench's decision in REI Agro Ltd., which emphasized that disallowance under Rule 8D(2)(iii) should be based on 0.5% of the average value of investments yielding exempt income.

The Tribunal upheld the CIT(A)'s decision, confirming that the AO's calculation was incorrect and that the CIT(A) correctly computed the disallowance at ?29,560/-. The Tribunal found no infirmity in the CIT(A)'s order and rejected the revenue's appeal on this ground.

Conclusion:
The Tribunal dismissed the revenue's appeal, confirming the CIT(A)'s deletion of the addition under Section 36(1)(iii) and the reduction of the disallowance under Section 14A read with Rule 8D. The Tribunal's decision was based on consistent facts, judicial precedents, and proper application of legal provisions.