2018 (4) TMI 702 - AT - Income Tax

Disallowance of interest expenditure - Held that - Excess borrowings made by Shri J.P. Agarwal from the assessee company was in the normal course of business and to retain the facility of loan availed from the bank, which clearly demonstrates the business nexus of the advances made by the company to Shri J.P. Agarwal. Hence, it cannot be said that the monies advanced to Shri J.P. Agarwal were for non-business purposes. Once the money is borrowed for the purpose of business and interest is paid thereon, the same would be squarely allowable as deduction u/s 36(1)(iii) of the Act. Accordingly, the lending of monies to Shri J.P. Agarwal (Individual) and Shri J.P. Agarwal (Karta of HUF) is for the purpose of business and hence no proportionate disallowance of interest paid on borrowed capital could be made in respect of amounts advanced to these two parties. With regard to amounts advanced to Kolkata Concrete Pvt. Ltd. (sister concern of the assessee) assessee had charged interest on the amounts advanced to them during assessment year 2008-09 and had offered to tax - since M/s Kolkata Concrete Pvt. Ltd. was facing financial crunch and was in bad position, the assessee company waived its right to charge interest during assessment year 2009- 10 i.e. the year under appeal and was able to recover a substantial portion of balance outstanding in the sum of ₹ 1,36,30,495/- during the year, thereby leaving a meager balance of ₹ 9,09,183/- as on 31.03.2009. In any case, we find that the assessee is having sufficient funds to make advance to M/s Kolkata Concrete Pvt. Ltd. as is evident from the balance sheet. Hence, there cannot be any disallowance of interest u/s 36(1)(iii) - Decided in favour of assessee Disallowance u/s 14A - Held that - The assessee is having sufficient own funds and in any case we are inclined to agree with the argument of AR that the interest received by the assessee is to be netted off with interest paid and bank interest also deserves to be excluded for the purpose of computing disallowance under the second limb of Rule 8D(2) - Once the bank interest is reduced from the total interest payment and the resultant figure thereon is netted off with interest received by the assessee on the loan given by the assessee, then there is no positive figure of interest payment. Hence, no disallowance under the second limb of Rule 8D(2) is warranted. With regard to disallowance under the third limb of Rule 8D(2) in the sum of ₹ 2,515/- the ld. AR fairly agreed for the same. In any case it is already settled that the disallowance under 14A read with Rule 8D cannot exceed the exempt income claimed by the assessee - addition made under the second limb of Rule 8D(2) is hereby directed to be deleted and disallowance under the third limb is sustained - Decided partly in favour of assessee.

Summary

Issues involved:
1. Disallowance of interest expenditure
2. Disallowance under section 14A of the Income Tax Act

Issue 1: Disallowance of interest expenditure:

The appeal concerned the disallowance of interest expenditure of ?10,00,515 by the Learned Commissioner of Income Tax (Appeals) against the order passed by the Income Tax Officer under section 143(3) of the Income Tax Act for the Assessment Year 2009-10. The primary contention was whether the interest expenditure was justified given the circumstances. The assessee, a converted limited company, had advanced funds to its Director and a related concern without charging interest. The Income Tax Officer sought to disallow the proportionate interest claimed as deduction by the assessee, leading to the disallowance figure. However, the Appellate Tribunal, after considering various submissions and the business nexus, held that the advances made were for business purposes and not diverted for non-business reasons. The Tribunal emphasized that when money is borrowed for business purposes and interest is paid, it is allowable as a deduction under the Act. The Tribunal also analyzed the amounts advanced to the sister concern and concluded that no disallowance of interest was warranted. Consequently, the Tribunal allowed the appeal on this ground.

Issue 2: Disallowance under section 14A of the Income Tax Act:

The second issue revolved around the disallowance under section 14A of the Income Tax Act concerning the dividend income earned by the assessee. The Income Tax Officer had made a disallowance under Rule 8D, which was upheld by the Learned Commissioner of Income Tax (Appeals). The assessee contended that no expenditure was incurred for earning the dividend income, thus no disallowance under section 14A was necessary. During the appeal, the assessee argued that the interest paid and received should be netted off, and since the assessee had sufficient own funds for investments, no disallowance was warranted. The Tribunal agreed with the assessee's argument and directed the deletion of the disallowance under the second limb of Rule 8D(2). However, the disallowance under the third limb of Rule 8D(2) was sustained. The Tribunal clarified that the disallowance under section 14A with Rule 8D cannot exceed the exempt income claimed by the assessee. As a result, the Tribunal partly allowed the appeal on this ground.

In conclusion, the Appellate Tribunal, after thorough deliberation and analysis, partly allowed the appeal of the assessee concerning the disallowance of interest expenditure and the disallowance under section 14A of the Income Tax Act. The Tribunal's decision was based on the business nexus of the transactions and the provisions of the Act, ensuring a fair and just outcome in accordance with the law.