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2020 (4) TMI 426 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - suo moto disallowance by assessee - share investments are in the nature of strategic investments to acquire the controlling interest in the appellant s business division sold to its wholly owned subsidiary companies in the year under reference - HELD THAT - CIT (A) has justified the suo moto disallowance of ₹ 5,00,000/-made by the assessee inter alia on the ground that if strategic investments are excluded disallowance u/s 8D(ii) would come down to ₹ 2,17,950/- and further 0.5% of average investments would worked out to ₹ 59,190/- under rule 8D(2) (iii). As pointed out by the Ld. DR, the Hon ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT 2018 (3) TMI 805 - SUPREME COURT has held that the dominant purpose for which investment into shares made by the assessee is not relevant as section 14A applies irrespective of whether shares are held to gain control or as stock in trade. Where shares are held as stock in trade the main purposes to trade in shares and earned profit and in this process certain dividend is also earned which is exempt u/s 10(34) of the Act. Therefore, the expenditure attributable to exempt income will have to be apportioned and disallow u/s 14A of the Act. Assessee has rightly pointed out that in the case of Joint Investment Pvt. Ltd. vs. CIT 2015 (3) TMI 155 - DELHI HIGH COURT has held that disallowance u/s 14A cannot exceed the dividend income. In the present case, the assessee earned exempt income of ₹ 7,00,000/- during the previous year and it has made suo moto disallowance of ₹ 5,00,000/- u/s 14A of the Act. In the light of the ratio laid down by the Hon ble Delhi High Court, the disallowance cannot exceed the exempt income of ₹ 7,00,000/-. Hence findings of the Ld. CIT (A) is erroneous to the extent that the Ld. CIT (A) has justified the suo moto disallowance on the ground that the AO has not excluded the strategic investments made by the assessee during the previous year. Partly allow this grounds of appeal of the revenue and modify the impugned order and direct the AO to restrict the disallowance to ₹ 7,00,000/-. Since, we have partly allowed the appeal of the revenue and directed the AO to restrict the addition to the exempt income earned by the assessee, we partly allow the cross objection filed by the assessee. Disallowance u/s 36(1) (va) r.w.s. 2(24) (x) - assessee had deposited being employees contribution towards Provident Fund and ESIC after the due date prescribed under the relevant Act - HELD THAT - As relying on HINDUSTAN ORGANICS CHEMICALS LTD. 2014 (7) TMI 477 - BOMBAY HIGH COURT and GHATGE PATIL TRANSPORTS LTD. 2014 (10) TMI 402 - BOMBAY HIGH COURT appellant has deposited the EPF and ESIC contributions before the due date of filing of Income tax Return, thus disallowance is hereby deleted. Addition of notional interest out of the interest paid during the previous year - whether assessee failed to offer explanation to the satisfaction of the AO, the AO rightly worked out the interest @ 12% on the said advances and added back the same to the income of the assessee? - HELD THAT - CIT (A) has deleted the addition made on account of disallowance of notional interest out of the interest paid during the relevant year on the ground that the assessee had surplus funds with it while the loans in question were advanced. As per the computation by the Ld. CIT (A) the assessee had surplus fund of ₹ 3846.97 lakhs which was more than the investments made and the loans advanced. Hence, the Ld. CIT (A) has rightly deleted the addition by following the ratio laid down in the case of CIT vs. Reliance Utilities 2009 (1) TMI 4 - BOMBAY HIGH COURT wherein the Hon ble Court has held that if the assessee is having sufficient interest free funds available with it to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were made from the interest free funds available with the assessee. Hence, we do not find any infirmity in the findings of the Ld. CIT (A) to interfere with.
Issues Involved:
1. Disallowance under Section 14A read with Rule 8D. 2. Disallowance under Section 36(1)(va) read with Section 2(24)(x) for delayed payment of employees' contributions to Provident Fund and ESIC. 3. Disallowance of notional interest on interest-free loans to subsidiaries. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D: The revenue challenged the CIT (A)'s decision to grant relief to the assessee on disallowance under Section 14A read with Rule 8D. The AO had computed a disallowance of ?3,74,41,262, while the assessee had made a suo moto disallowance of ?5,00,000. The CIT (A) justified the assessee's disallowance, but the tribunal noted that the disallowance should not exceed the exempt income of ?7,00,000 earned during the year. Thus, the tribunal directed the AO to restrict the disallowance to ?7,00,000, following the Delhi High Court's ratio in Joint Investments Pvt. Ltd. vs. CIT. 2. Disallowance under Section 36(1)(va) read with Section 2(24)(x): The revenue contested the CIT (A)'s decision to delete the disallowance of employees' contributions to Provident Fund and ESIC, which were deposited after the due dates prescribed under the relevant Act but before the due date of filing the return. The CIT (A) relied on the Bombay High Court's judgments in CIT vs. Hindustan Organics Chemicals Ltd. and CIT vs. Ghatge Patil Transport Ltd., which held that such contributions are allowable if deposited before the return filing due date. The tribunal upheld the CIT (A)'s decision, finding no infirmity in the deletion of the disallowance. 3. Disallowance of Notional Interest on Interest-Free Loans to Subsidiaries: The revenue challenged the CIT (A)'s deletion of disallowance of notional interest on interest-free loans given to subsidiaries. The AO had added back notional interest, assuming the borrowed funds were used for non-business purposes. The CIT (A) found that the loans were advanced in earlier years from surplus funds and for business purposes, following the Bombay High Court's ruling in CIT vs. Reliance Utilities and the Supreme Court's decision in SA Builders Ltd. vs. CIT. The tribunal upheld the CIT (A)'s decision, noting that the assessee had sufficient interest-free funds to cover the loans. Assessment Years 2012-13, 2013-14, and 2014-15: For subsequent assessment years, the tribunal followed the same reasoning as for AY 2011-12. The disallowance under Section 14A was restricted to the exempt income earned during each year. The tribunal upheld the CIT (A)'s deletion of disallowances under Section 36(1)(va) and notional interest on loans to subsidiaries, consistent with the principles established in earlier years. Conclusion: The tribunal partly allowed the appeals of the revenue and the cross objections of the assessee, directing adjustments to disallowances under Section 14A to match the exempt income earned and upholding the CIT (A)'s decisions on other disallowances. The order was pronounced on 31st January, 2020.
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