2019 (9) TMI 1198 - AT - Income Tax

Disallowance of interest expenditure u/s 36(1)(iii) - disallowance of interest expenditure on loans advanced to three parties have been sustained by him primarily for the reason that interest bearing funds have been advanced for non business purpose - HELD THAT - As regards assessee s claim that the loan advanced to the aforesaid three parties were for the purpose of business, we must observe that the loan advanced to the two individuals i.e., Khusru Jujina and Ramesh Jogani cannot be considered to be for the purpose of assessee s business as they are not the employee of the assessee but are employees of another group company and the assessee has not established the business gain derived by it by advancing such loan. By merely stating that the concerned parties have rendered some services, assessee s claim cannot be accepted. Insofar as the loan advanced to Nariman Infrastructure Pvt. Ltd., the assessee is required to establish the business expediency in advancing the loan. By merely claiming that the subsidiary is in real estate business assessee s claim cannot be allowed. However, it is the specific contention of the assessee that the assessee had sufficient interest free fund available to make such advances. The aforesaid contention of the assessee requires verification as neither the AO nor learned Commissioner (Appeals) have factually verified the availability of sufficient interest free fund with the assessee. In case, the assessee is found to be having sufficient interest free funds to advance the aforesaid loans, no disallowance of interest expenditure should be made. Disallowance of expenditure u/s 14A r/w rule 8D - HELD THAT - Notably, before the first appellate authority, the assessee had specifically pleaded that no disallowance under section 14A r/w rule 8D can be made in the absence of any exempt income earned by the assessee during the year. The fact that the assessee has not earned any exempt income during the year, has not been disputed by the Revenue. That being the case, as per the ratio laid down in the decisions cited before us by the learned Sr. Counsel for the assessee, no disallowance under section 14A r/w rule 8D can be made. Addition for deduction of interest expenditure claimed under section 24(b) - HELD THAT - When a part of the building is used for commercial purpose and the rest of it is let out, the interest expenditure on the loan availed for construction of building has to be apportioned between the area let out and area used for commercial purpose, as this is the most scientific basis on which the interest can be allocated. It is also very much clear that the Assessing Officer has not pointed out any major deficiency in allocation of interest expenditure between the area used for commercial purpose and area let out. The allegation of the Assessing Officer that the assessee at its own will changes the area let out is on a mere presumption. We do not find any material on record to indicate that the Assessing Officer had carried out any specific enquiry to disprove assessee s claim regarding the area let out. Moreover, when the allocation of interest expenditure in identical manner has been accepted by the Assessing Officer in past assessment years, there is no valid reason for not accepting it in the impugned assessment year when the facts are identical. In any case of the matter, the expenditure incurred by the assessee would be allowable either under section 24(b) or under section 36(1)(iii) of the Act. That being the case, it will make no difference to the Revenue

Issues Involved:
1. Disallowance of interest expenditure under section 36(1)(iii) of the Income-tax Act, 1961.
2. Disallowance of expenditure under section 14A r/w rule 8D.
3. Deletion of addition made from deduction of interest expenditure claimed under section 24(b) of the Act.
4. Partial relief granted on account of deduction of interest expenditure claimed on loan advanced to related parties.

Issue-wise Detailed Analysis:

1. Disallowance of interest expenditure under section 36(1)(iii) of the Income-tax Act, 1961:

The assessee challenged the disallowance of ?36,27,796 as interest expenditure. The Assessing Officer (AO) noticed that the assessee had taken loans amounting to ?41,21,88,995 and claimed interest payment of ?52,12,41,939. The AO found that the assessee had diverted interest-bearing funds for non-business purposes, including advances for flats and loans to related entities without charging interest, leading to a disallowance of ?1,11,39,949. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the disallowance for advances towards flats but sustained it for loans to Nariman Infrastructure Pvt. Ltd. and two employees, as they were not for business purposes. The Tribunal remanded the issue back to the AO for verification of the availability of sufficient interest-free funds, as claimed by the assessee.

2. Disallowance of expenditure under section 14A r/w rule 8D:

The AO noticed that the assessee had made investments of ?109,67,30,099 and borrowed funds of ?441,21,88,995, disallowing ?12,10,47,345 under section 14A r/w rule 8D. The CIT(A) granted partial relief by excluding share application money and investment in a flat from the average value of investments. The Tribunal deleted the disallowance, noting that the assessee had not earned any exempt income during the year, following the ratio of various judicial decisions, including the Hon'ble Supreme Court's dismissal of the Revenue's SLP in CIT v/s Chellinad Logistics Pvt. Ltd.

3. Deletion of addition made from deduction of interest expenditure claimed under section 24(b) of the Act:

The AO disallowed ?7,23,51,153 claimed under section 24(b), arguing that the deduction depended on fund utilization, not the area let out. The CIT(A) allowed the deduction, accepting the assessee's allocation based on the area let out. The Tribunal upheld the CIT(A)'s decision, noting that the loan was for constructing a building, part of which was let out, and the allocation method was consistent with past assessments. The Tribunal found no evidence of the AO disproving the assessee's claim or any major deficiency in the allocation method.

4. Partial relief granted on account of deduction of interest expenditure claimed on loan advanced to related parties:

The Revenue challenged the CIT(A)'s acceptance of additional evidence without following section 46A. The Tribunal, having already dealt with a similar issue in the assessee's appeal, dismissed these grounds, finding no necessity for separate adjudication.

Conclusion:

The Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal, providing a detailed analysis and remanding certain issues for further verification while upholding the CIT(A)'s decisions on others. The judgment emphasized the need for proper verification of claims and consistency in applying judicial principles.

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