2019 (12) TMI 772 - AT - Income Tax

Disallowance of interest expenditure u/s 14A - HELD THAT - Reserve and surplus available with the assessee as on 31.03.2010 at ₹ 1000.63 Crores was much more than this tax-exempt investments of the assessee company. In the light of these facts, now we examine the applicability of the judgment of Hon ble Karnataka High Court rendered in the case of CIT Vs. Microlabs 2016 (4) TMI 219 - KARNATAKA HIGH COURT on which reliance has been placed by assessee. In this case, Hon ble Karnataka High Court has followed the judgment rendered in the case of CIT Vs. HDFC Bank 2014 (8) TMI 119 - BOMBAY HIGH COURT wherein it was held that when investments are made out of common pool of funds and non interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s 14A can be made. Disallowance of the net Aircraft expenditure - HELD THAT - A categorical finding has been given by the CIT(A) in his order that the assessee satisfies both the conditions and on this basis, it was held by him that the assessee is eligible for depreciation on the Aircraft. He has further noted that the Aircraft was acquired to run it on hire and air craft charges are in fact received and, on this basis, he decided that depreciation on Aircraft of ₹ 2100,08,528/- is allowed. We find that there is no dispute that an amount of ₹ 269,80,969/- was earned by the assessee towards aircraft hire charges and the expenses claimed by the assessee of ₹ 1983.43 lakhs is after reducing the charges received by the assessee of ₹ 269.81 lakhs. Under these facts, we find no infirmity in the order of the CIT(A) as per which it was held by him that the expenses on aircraft including depreciation is allowable. Section u/s 14A disallowance - HELD THAT - This is the main claim of the assessee before CIT(A) that the assessee is a registered NBFC and the main business of the assessee is to lend money and to invest in equity shares of various companies. It is also claimed before the CIT(A) that the assessee has earned interest income of about ₹ 41 Crores and the assessee has a share capital reserve of ₹ 1001 Crores. Out of this capital and reserve of ₹ 1000.63 Crores, if we reduce investment in shares considered for 14A disallowance of ₹ 313.11 Crores as on 31.03.2010, then also, surplus amount of approx. ₹ 688 Crores remains to take care of share application money given by the assessee of ₹ 65.22 Crores. By following the same judgment of rendered in the case of CIT Vs. Microlabs 2016 (4) TMI 219 - KARNATAKA HIGH COURT we hold that no disallowance is called for in respect of investment by way of share application money

Summary

Issues Involved:
1. Disallowance under Section 14A.
2. Disallowance of net aircraft expenditure.
3. Treatment of payment towards purchase of movie rights.
4. Protective addition under Section 36(1)(iii) on loans to sister concerns and subsidiaries.
5. Interest disallowance under Section 36(1)(iii).

Detailed Analysis:

1. Disallowance under Section 14A:
The Revenue challenged the CIT(A)'s decision to restrict the disallowance under Section 14A from ?1,94,11,402 to ?1,27,98,632. The CIT(A) deleted the interest disallowance of ?64,12,770, noting that the assessee's reserves and surplus were significantly higher than the tax-exempt investments. The Tribunal upheld the CIT(A)'s order, referencing the Karnataka High Court judgment in CIT Vs. Microlabs Ltd., which followed the Bombay High Court's ruling in CIT Vs. HDFC Bank. This precedent established that when non-interest-bearing funds exceed investments in tax-free securities, no disallowance of interest expenditure under Section 14A can be made. Thus, the Tribunal rejected the Revenue's appeal on this ground.

2. Disallowance of Net Aircraft Expenditure:
The Revenue contested the CIT(A)'s restriction of disallowance of net aircraft expenditure to ?45.60 lakhs. The CIT(A) allowed depreciation on the aircraft, finding that the assessee satisfied the ownership and business use conditions required under Section 32. The Tribunal agreed with the CIT(A), noting that the aircraft was used for business purposes and hire charges were earned. The Tribunal found no infirmity in the CIT(A)'s decision to allow the aircraft expenses, including depreciation, and rejected the Revenue's appeal on this issue.

3. Treatment of Payment Towards Purchase of Movie Rights:
The Revenue argued that the payment of ?20 lakhs towards movie rights should be treated as a capital asset since the movies were neither sold nor shown as stock-in-trade. The CIT(A) treated the payment as a business expense, noting it was an advance payment written off as a bad debt. However, the Tribunal found no detailed factual finding on whether the movies were acquired or the reasons for non-acquisition. Consequently, the Tribunal reversed the CIT(A)'s order and restored the AO's decision to treat the payment as a capital asset, allowing the Revenue's appeal on this ground.

4. Protective Addition Under Section 36(1)(iii) on Loans to Sister Concerns and Subsidiaries:
The AO disallowed ?1,71,07,416 as interest expenditure, noting the loans to sister concerns lacked specific business purposes. The CIT(A) deleted this disallowance, but the Tribunal noted that the same interest expenditure was considered under Section 14A, and the CIT(A)'s deletion of the disallowance under Section 14A was upheld. The Tribunal found that the assessee's reserves and surplus were sufficient to cover the share application money given to sister concerns. Following the Karnataka High Court's judgment in CIT Vs. Microlabs, the Tribunal upheld the CIT(A)'s deletion of the disallowance under Section 36(1)(iii), rejecting the Revenue's appeal on this issue.

5. Interest Disallowance Under Section 36(1)(iii):
The AO had disallowed ?1,06,94,646 out of interest expenditure under Section 36(1)(iii), in addition to the disallowance under Section 14A. The CIT(A) deleted this disallowance, noting that the assessee had sufficient non-interest-bearing funds to cover the investments. The Tribunal upheld the CIT(A)'s order, referencing the same principles applied in the Section 14A disallowance. Thus, the Tribunal rejected the Revenue's appeal on this ground as well.

Conclusion:
The Tribunal partly allowed the Revenue's appeal, reversing the CIT(A)'s decision on the treatment of payment towards movie rights but upheld the CIT(A)'s decisions on other issues, including the disallowance under Section 14A, net aircraft expenditure, and interest disallowance under Section 36(1)(iii).