2018 (4) TMI 869 - AT - Income Tax

Disallowance u/s. 14A - Held that - There is no finding that the assessee has earned any dividend income out of the concerned investments. Hence we hold that no disallowance u/s. 14A is permissible inasmuch as the assessee has not earned any exempt income on the concerned investment. MAT computation - disallowance u/s 14A for purpose of calculating the MAT u/s 115JB - Held that - Since the assessee has not earned any exempt income, no disallowance is permissible u/s. 14A. No disallowance is required under normal provisions. In this view of the matter, no issue arises as to the disallowance of expenses u/. 115JB of the Act. Hence, this ground raised by the Revenue stands dismissed. Disallowance of interest u/s 36(l)(iii) - assessee had failed to prove during the course of assessment proceedings that the expenditure incurred on its subsidiary companies were from its surplus funds and not interest-bearing funds - Held that - Identical issue was considered by this tribunal in assessee s own case for assessment year 2009-10 that the assesses has incurred expenses on behalf of certain foreign subsidiaries and Indian subsidiary and shown them under the head Advances Recoverable. The assessee has not made any non business advance to the these companies, but these amount represents various debits in the nature of sale of spares, royalty receivable, service charges and the expenses incurred on their behalf such as traveling expenses, establishment expenses, financial guarantees, communications expenses, etc. The assessee does not have system of charging interest on such debits of expenses incurred on their behalf. Such advances did not attract any adjustment in Transfer Pricing order also. AO considered these debit balances as advances without interest and disallowed as interest u/s. 36(1)(iii). We do not find any merit for the disallowance so made by the A.O. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Set-off of brought forward Mark to Market (MTM) loss.
3. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:

The primary issue pertains to the disallowance of ?1,91,28,205/- under Section 14A, which includes ?1,52,53,225/- out of interest and ?38,74,980/- out of expenses. The assessee argued that the investments were made from internal accruals and interest-free funds, and that the investments were strategic in nature, primarily in subsidiaries and associates, thus not warranting disallowance. The CIT(A) upheld the disallowance, referencing previous years’ orders where similar claims were dismissed. However, the CIT(A) directed that the disallowance should not be added to book profits under Section 115JB, citing precedents from the Supreme Court and ITAT.

Upon appeal, the tribunal noted that the assessee had not earned any exempt income from the investments in question, referencing the Delhi High Court’s decision in Cheminvest Ltd. vs CIT and the Bombay High Court’s decision in Principal CIT vs. Ballarpur Industries Ltd. Consequently, the tribunal held that no disallowance under Section 14A was permissible as the assessee had not earned any exempt income from the concerned investments.

2. Set-off of brought forward Mark to Market (MTM) loss:

The assessee contested the denial of set-off of brought forward MTM loss against MTM profit, arguing that the CIT(A) erred in treating MTM (Foreign exchange) loss as speculation loss while treating MTM gain as normal income. The tribunal noted that the ITAT in the preceding year had classified the impugned income as business income, rendering the issue infructuous. Thus, the tribunal dismissed this ground as no longer relevant.

3. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act:

The Revenue appealed against the deletion of disallowance of ?37,61,893/- under Section 36(1)(iii), arguing that the assessee failed to prove that the expenditure on subsidiaries was from surplus funds and not interest-bearing funds. The Assessing Officer had disallowed the interest, citing that the advances to subsidiaries were made from interest-bearing funds without establishing a business purpose.

The CIT(A) had deleted the disallowance, referencing consistent deletions of similar disallowances in previous years, which had been accepted by the Department. The tribunal upheld the CIT(A)’s order, noting that the advances were for business purposes, including expenses incurred on behalf of subsidiaries, and were not non-business advances. The tribunal found no merit in the disallowance made by the Assessing Officer, affirming the CIT(A)’s decision.

Conclusion:

The tribunal partly allowed the assessee’s appeal, holding that no disallowance under Section 14A was permissible due to the absence of exempt income. The tribunal dismissed the Revenue’s appeal, upholding the CIT(A)’s deletion of the interest disallowance under Section 36(1)(iii). The issue of set-off of brought forward MTM loss was deemed infructuous and dismissed accordingly.