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2019 (11) TMI 981 - AT - Income TaxDisallowance u/s. 36(1)(iii) - Assessee contended that amounts borrowed by the assessee were utilized for the purpose of the business and therefore no proportionate interest is liable to be disallowed u/s. 36(1)(iii) - HELD THAT - On a perusal of the balance sheet, we find that assessee had sufficient interest free own funds to the extent of ₹ 804.95 Crores in the form of share capital, reserves and surplus and money received against share warrant and the assessee made investment in work in progress at ₹ 48.11 crores and also increase in long term loans and advances to the extent of ₹ 31.03 crores. Therefore, undoubtedly the assessee is having its own interest free funds more than the amount of advances given to various parties and the investments shown in capital work in progress. In the case of CIT v. Reliance Utilities and Power Limited 2009 (1) TMI 4 - BOMBAY HIGH COURT identical issue has come up before the Hon'ble Jurisdictional High Court as to whether there can be any disallowance u/s. 36(1)(iii) of the Act when the assessee has interest free funds more than the investments and when assessee paid interest on borrowals utilized for investments. Assessee is having sufficient interest free funds much more than the investments made by the assessee in capital work in progress and also in providing long term loans and advances to various parties. In the circumstances, the presumption is that the assessee has made investments from out of its interest free funds only and therefore there cannot be any proportionate disallowance u/s. 36(1)(iii) - we direct the Assessing Officer to delete the disallowance made u/s. 36(1)(iii) Disallowance made u/s. 14A r.w. Rule 8D - HELD THAT - Hon'ble Supreme Court in the case of PCIT v. State Bank of Patiala ( 2018 (11) TMI 1565 - SC ORDER ) the Special Leave Petition filed against the decision of the Hon'ble Punjab and Haryana High Court in the case of PCIT v. State Bank of Patiala 2018 (4) TMI 23 - PUNJAB HARYANA HIGH COURT has been dismissed by upholding the order of the Hon'ble High Court in holding that amount of disallowance u/s. 14A of the Act shall be restricted to amount of exempt income only and not a higher figure. We respectfully following the said decision direct the Assessing Officer to restrict the disallowance u/s. 14A r.w. Rule 8D of I.T. Rules only to the extent of exempt income earned by the assessee during the relevant Assessment Year. This ground is partly allowed. Assessee in default u/s. 201(1) - TDS u/s 194H and 194C - disallowance u/s. 40(a)(ia) for non-deduction of tax at source in respect of professional fees and payments made towards advertisements - HELD THAT - Assessee therein, cannot be treated as as assessee in default u/s 201(1), if the recipient has offered the income and has paid the taxes thereon - In the case of the assessee before us, the recipients of the payment, have already offered the income in their hands and therefore, the assessee cannot be treated as as assessee in default Disallowance of interest on Service Tax and VAT - Assessee submits that the said amounts are not penal in nature and hence allowable as business expenditure - HELD THAT - Interest paid on Service Tax and VAT is not penal in nature and therefore is allowable as deduction. Thus, following the said decision BSR Co. . 2018 (8) TMI 1903 - ITAT MUMBAI . we direct the Assessing Officer to delete the disallowance of interest on Service Tax and VAT and recompute the income of the assessee.
Issues Involved:
1. Disallowance under section 14A of the IT Act read with Rule 8D(ii). 2. Disallowance of interest expenditure under section 36(1)(iii) of the IT Act. 3. Disallowance under section 40(a)(ia) for non-deduction of tax at source. 4. Disallowance of service tax liability under section 43B. 5. Disallowance of interest on service tax and VAT. 6. Enhancement of book profits under section 115JB by invoking section 14A and Rule 8D. Issue-wise Detailed Analysis: 1. Disallowance under section 14A of the IT Act read with Rule 8D(ii): The Revenue's appeal contested the deletion of disallowance under section 14A read with Rule 8D(ii) by the CIT(A). The Tribunal found that the tax effect was below ?50 Lakhs, making the appeal non-maintainable as per the CBDT Circular No. 17/2019. Consequently, the Revenue's appeal was dismissed. 2. Disallowance of interest expenditure under section 36(1)(iii) of the IT Act: The assessee's cross objection challenged the disallowance of interest expenditure on borrowings used for capital work in progress and long-term loans. The Tribunal noted that the assessee had sufficient interest-free funds (?804.95 Crores) to cover the investments (?48.11 Crores in capital work in progress and ?31.03 Crores in long-term loans). Citing the Supreme Court's decision in CIT v. Reliance Industries Limited and the Bombay High Court's decision in CIT v. Reliance Utilities and Power Ltd., the Tribunal held that the presumption is that investments were made from interest-free funds. Thus, the disallowance under section 36(1)(iii) was deleted. 3. Disallowance under section 40(a)(ia) for non-deduction of tax at source: The assessee argued that disallowance under section 40(a)(ia) should not apply if the assessee was not treated as a defaulter under section 201(1). The Tribunal admitted this legal ground and referred to the Hyderabad Bench's decision in Country Club Hospitality & Holidays Ltd v. Addl. CIT, which held that if the recipient of the payment has offered the income to tax, the payer should not be treated as an assessee in default. Following this precedent, the Tribunal directed the deletion of the disallowance under section 40(a)(ia). 4. Disallowance of service tax liability under section 43B: This ground was not pressed by the assessee during the hearing and was thus dismissed as not pressed. 5. Disallowance of interest on service tax and VAT: The assessee contended that interest on service tax and VAT is compensatory, not penal, and should be deductible. The Tribunal referred to the Mumbai Bench's decision in BSR & Co. v. ACIT, which held that interest on service tax is compensatory and allowable as a deduction. The Tribunal followed this reasoning and directed the deletion of the disallowance. 6. Enhancement of book profits under section 115JB by invoking section 14A and Rule 8D: This ground was also not pressed by the assessee during the hearing and was dismissed as not pressed. Conclusion: The Revenue's appeal was dismissed due to low tax effect. The assessee’s cross objection was partly allowed, with significant deletions of disallowances under sections 36(1)(iii), 40(a)(ia), and interest on service tax and VAT. The grounds related to service tax liability under section 43B and enhancement of book profits under section 115JB were dismissed as not pressed.
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