2018 (10) TMI 1113 - AT - Income Tax

Disallowance u/s 14A - no expenditure incurred towards exempted income - Held that - It is settled law that the dissatisfaction as to the claim of the assessee of the amount incurred towards exempted income or no expenditure incurred towards exempted income, is prerequisite for invoking provisions of section 14A(2) read with rule 8D of the Rules. We find that the Ld. CIT(A) in para 4.3.1 of the impugned order has recorded that AO has not given the finding that he was not satisfied with assessee s claim of no expenditure incurred on the investment activity. The recording of dissatisfaction whether expressly or impliedly, is a requirement of law for making disallowance by the Assessing Officer and the Ld. CIT(A) cannot substitute the said dissatisfaction, which the Assessing Officer is required to record. Though on the merit, the Ld. CIT(A) has correctly recomputed the disallowance by way of segregating the interest expenditure directly related to investment for earning exempt income and interest which could not be directly attributable to any particular income, but once he himself has held that mechanical applying of Rule 8D by the AO is not tenable in view of the judicial pronouncement relied upon by the Ld. AR, he cannot proceed to recompute the disallowance. As per the records available before us, the Revenue has not filed any appeal challenging the finding of the Ld. CIT(A) that Assessing Officer has not given any finding as to dissatisfaction on the claim of the assessee of no expenditure incurred towards investment activity. Thus the action of Ld. CIT(A) in proceeding on merit to re-compute the disallowance under section 14A read with Rule 8D, is not justified and we accordingly reject it. - Decided in favour of assessee. Disallowance u/s 36(1)(iii) - assessee raised loan funds at high rate of interest but transferred to a sister concern or group concern at lower rate of interest or no interest without any business purpose - Held that - In the instant case, the assessee has failed to substantiate that the funds extended to sister concern were for the purpose of the business. In our opinion, the finding of the Ld. CIT(A) on the issue in dispute is well reasoned and we do not find any infirmity in the same, accordingly we uphold the disallowance and enhancement by the Ld. CIT(A) - decided against assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance 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 revolves around the disallowance of ?82,17,976/- under Section 14A of the Income Tax Act. The facts indicate that the assessee had investments in shares amounting to ?27,04,02,581/- and received dividend income of ?1,42,36,728/- which was claimed as exempt. The Assessing Officer (AO) invoked Rule 8D of the Income Tax Rules, 1962, and made a disallowance of ?2,01,90,351/-. However, the Commissioner of Income-tax (Appeals) [CIT(A)] reduced this to ?82,17,976/-.

The CIT(A) noted that the main activity of the assessee was investment, which required considerable manpower and resources. The CIT(A) observed that the assessee did not provide a breakup of expenses related to investment activities, leading to the rejection of the claim that no expenditure was incurred.

The CIT(A) recomputed the disallowance under Rule 8D by segregating interest payments directly attributable to investments and those not directly attributable. The assessee argued that the AO made the disallowance without recording dissatisfaction regarding the claim that no expenditure was incurred. The Tribunal held that dissatisfaction is a prerequisite for invoking Section 14A(2) read with Rule 8D. The CIT(A)'s observation that the AO did not record such dissatisfaction was crucial. Consequently, the Tribunal found the CIT(A)'s action of recomputing the disallowance unjustified and allowed the appeal on this ground.

2. Disallowance under Section 36(1)(iii) of the Income Tax Act:
The second issue pertains to the disallowance of ?57,89,101/- under Section 36(1)(iii), which was enhanced to ?1,26,36,772/- by the CIT(A). The AO noted that the assessee raised loans at high-interest rates but transferred funds to sister concerns at lower or no interest without any business purpose, leading to an excessive payment of interest.

The CIT(A) observed that the assessee borrowed funds from DBS Chola Mandalam Finance Ltd. and Barclays Bank Ltd. and provided a detailed utilization of these funds. The CIT(A) found that advances to M/s Tulip Telecom Ltd. and M/s Tulip Singapore were not for business purposes, leading to a disallowance of interest corresponding to these advances.

The assessee argued that mutual advances were made in the normal course of business and that the funds advanced to M/s Tulip Telecom were received back during the year. However, the Tribunal noted that the assessee failed to substantiate with documentary evidence that the advances were for business purposes. The Tribunal upheld the CIT(A)'s finding that the funds provided to sister concerns were not for business purposes and confirmed the disallowance of ?1,26,36,772/-.

Conclusion:
The appeal of the assessee was partly allowed. The disallowance under Section 14A was rejected due to the lack of recorded dissatisfaction by the AO, while the disallowance under Section 36(1)(iii) was upheld due to the failure of the assessee to substantiate that the advances were for business purposes.