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2020 (4) TMI 94 - AT - Income TaxDisallowance of interest payment - interest free advances given by the appellant company - whether appellant had advanced the loans and advances from its own funds and not out of the borrowed funds? - HELD THAT - Loans and advances including interest free advances are far less than the own funds. And hence, the presumption that the own funds have been utilized for extending the loans and advances sets in. When the assessee has got own funds available at their disposal, no disallowance is called for as enunciated in various judgments. The decision in the case of Bright Enterprises Pvt. Ltd. Vs. CIT 2015 (11) TMI 342 - PUNJAB HARYANA HIGH COURT it was held that if there are interest free funds available then it will be presumed that these have been made out of interest free funds. Similar view was held in the case of CIT Vs. Kapsons Associates Investment Pvt. Ltd. 2015 (8) TMI 1277 - PUNJAB AND HARYANA HIGH COURT as held that interest on investment in other properties not for business purpose cannot be disallowed if the assessee is having sufficient interest free funds at its disposal. Similar view was taken by the Hon'ble Supreme Court in the case of Hero Cycles Pvt. Ltd. 2015 (11) TMI 1314 - SUPREME COURT held that no disallowance is called for if the assessee has got own surplus fund. Keeping in view the fact that the assessee has got sufficient own funds to extend the loans interest free, we hereby direct that the disallowance made under section 36(1)(iii) be deleted. - Decided in favour of assessee. Disallowance u/s 14A r.w.r 8D(2)(iii) - 0.5% has applied on the average investments - AR argued that earning dividends is not an assured activity, no business man will ever incur a recurring in anticipation of non-assured returns especially dividends - HELD THAT - We hereby hold that the disallowance needs to be restricted to the dividend yielding investment only for the years involved. The Assessing Officer is hereby directed to re-compute the disallowance taking into consideration, the dividend yielding investments -The disallowance under Rule 8D(2)(iii) be restricted to dividend yielding investments to determine the average value of the investments. - Decided in favour of assessee.
Issues Involved:
1. Disallowance of interest payment on the interest-free advances given by the assessee. 2. Disallowance under Section 14A of the Income Tax Act, 1961, more than the disallowance made by the assessee suo moto. Issue-wise Detailed Analysis: 1. Disallowance of Interest Payment on Interest-Free Advances: The primary issue revolves around the disallowance of interest payments by the assessee on interest-free advances given. The Assessing Officer (AO) disallowed the interest expenses claimed by the assessee, arguing that the assessee used interest-bearing funds to provide interest-free advances to various group concerns and individuals, resulting in a proportionate disallowance of ?16,31,794/-. The assessee contended that the advances were made from its own funds and not from borrowed funds. The CIT (A) upheld the AO's decision, emphasizing that the burden of proof lay on the assessee to demonstrate that the advances were made from its own funds. Upon review, it was found that the assessee had sufficient own funds to cover the interest-free advances. The Tribunal referenced multiple judicial pronouncements, including the Hon'ble Punjab & Haryana High Court in the case of "Bright Enterprises Pvt. Ltd. Vs. CIT" and the Hon'ble Supreme Court in "Hero Cycles Pvt. Ltd.," which established that if an assessee has sufficient own funds, it is presumed that the advances were made from these funds. Consequently, the Tribunal directed the deletion of the disallowance made under Section 36(1)(iii). 2. Disallowance Under Section 14A r.w.r 8D(2)(iii): The second issue pertains to the disallowance under Section 14A read with Rule 8D(2)(iii). The AO questioned the basis on which the assessee disallowed ?4,10,947/- under Section 14A, eventually disallowing ?44,90,230/- based on 0.5% of the average value of investments. The CIT (A) supported the AO's decision, noting that the assessee had earned substantial tax-free dividend income and had investments yielding non-exempt income. The CIT (A) held that the disallowance under Rule 8D(2)(iii) was justified. The assessee argued that the disallowance should be limited to actual expenditure directly related to exempt income and that non-dividend yielding investments should be excluded. The Tribunal referenced the Hon'ble Delhi High Court's decision, which stated that Section 14A cannot be invoked if no exempt income is earned and that disallowance should be restricted to dividend-yielding investments. The Tribunal directed the AO to re-compute the disallowance, considering only the dividend-yielding investments to determine the average value of investments. Conclusion: (a) No disallowance on the interest is required when the assessee has sufficient own funds to lend/advance. (b) The disallowance under Rule 8D(2)(iii) should be restricted to dividend-yielding investments to determine the average value of the investments. Result: The appeals of the assessee were allowed, and the Tribunal directed the necessary adjustments as per the findings.
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