2020 (6) TMI 193 - AT - Income Tax

Disallowance of interest expenses paid to the related parties being excessive - AO during the assessment proceedings found that the assessee had paid interest on the borrowed fund at different rates ranging from 12% to 24% p.a. thus worked out the reasonable rate of interest being 18% on the fund borrowed from the relatives - HELD THAT - There cannot be any disallowance for the year under consideration on the money borrowed in the earlier year. As relying on SRIDEV ENTERPRISES 1991 (1) TMI 52 - KARNATAKA HIGH COURT we hold that there cannot be any disallowance on account of interest expenses being excessive paid to the related parties under section 40A of the Act. Hence we set aside the finding of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Disallowance u/s 14A r.w.r 8D - HELD THAT - It is the settled laws that there cannot be any disallowance of interest expenses if the own fund of the assessee exceeds the amount of investments. Admittedly the own fund of the assessee exceeds the amount of investment in the present case. In this connection, we find support and guidance from the judgment in the case of Reliance Utilities 2009 (1) TMI 4 - BOMBAY HIGH COURT wherein held if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments - Thus we hold that no disallowance of interest expense claimed by the assessee can be made on account of investments as discussed above under the provision of section 14A r.w.r. 8D - Decided in favour of assessee. Addition of administrative expenses - HELD THAT - AR at the time of hearing has not advanced any argument about the disallowance made by the authorities below. Accordingly we confirm the disallowance for the administrative expenses made by the authorities below. Hence the ground of appeal of the assessee is partly allowed. MAT computation - Working out the book profit under the provisions of section 115 JB for disallowance u/s 14A - HELD THAT - We hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. 2014 (11) TMI 1169 - CALCUTTA HIGH COURT We note that there is no mechanism/ manner given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the expenses with respect to the exempted income. Therefore in the given facts circumstances, we feel that adhoc disallowance will serve the justice to both the Revenue and assessee to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance of 1% of the exempted income under the clause (f) to Explanation-1 of Sec. 115JB of the Act, subject to the condition that the disallowance shall not exceed the amount of disallowance determined by the authorities below under the provisions of section 14A r.w.r. 8D of Income Tax Rules. Hence, the ground of appeal of the assessee is partly allowed. Delay in deposit made to the employees Provident fund and ESIC - Addition on account of delay in deposit the employee s contribution under section 36(1)(va) - HELD THAT - As decided in GUJARAT STATE ROAD TRANSPORT CORPORATION 2014 (1) TMI 502 - GUJARAT HIGH COURT such sums were not credited by the respective assessee to the employees 'accounts in the relevant fund or funds on or before the due date as per the Explanation to section 36(1)(va) of the Act i.e. date by which the concerned assessee was required as an employer to credit employees' contribution to the employees account in the Provident Fund under the Provident Fund Act and/or in the ESI Fund under the ESI Act. - Decided against assessee. Order being pronounced after ninety (90) days of hearing - COVID-19 pandemic and lockdown - HELD THAT - Taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded. See case of DCIT vs. JSW Limited 2020 (5) TMI 359 - ITAT MUMBAI

Summary

Issues Involved:

1. Disallowance of interest expenses under Section 40A(2) of the Income Tax Act.
2. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules.
3. Addition to book profit under Section 115JB of the Income Tax Act.
4. Disallowance of delayed employee’s contribution under Section 36(1)(va) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Expenses under Section 40A(2):

The assessee, a private limited company, contested the disallowance of ?17,44,117/- made by the Assessing Officer (AO) on account of interest expenses paid to related parties, which were deemed excessive. The AO found that the assessee paid interest at rates ranging from 12% to 24% per annum and determined a reasonable rate of 18%. The disallowance was confirmed by the CIT(A), who noted that the assessee's claim of borrowing restrictions under the Companies Act was incorrect and that the interest rates paid to outsiders were significantly lower (12%).

The Tribunal observed that under Section 40A(2), the AO must bring on record comparable cases to prove that the expenditure is excessive or unreasonable. Since the AO failed to provide such comparables, the Tribunal held that no disallowance could be made. Additionally, it was noted that the interest payments to related parties were accepted in previous years without disallowance. Consequently, the Tribunal directed the AO to delete the addition, allowing the assessee's appeal on this ground.

2. Disallowance under Section 14A read with Rule 8D:

The assessee earned exempt income of ?70,695/- but made no disallowance under Section 14A read with Rule 8D. The AO disallowed ?4,07,511/- under these provisions, which was later restricted to ?70,695/- by the CIT(A).

The Tribunal found that the assessee's own funds exceeded the amount of investments, relying on judgments from the Bombay High Court and Gujarat High Court, which established that if own funds are sufficient to cover investments, no disallowance of interest expenses is warranted. Therefore, the Tribunal directed the deletion of the interest expense disallowance. However, the disallowance of administrative expenses was confirmed as the assessee did not contest this part. Thus, the appeal was partly allowed on this ground.

3. Addition to Book Profit under Section 115JB:

The AO added ?4,07,511/- disallowed under Section 14A to the book profit under Section 115JB, which was reduced to ?70,695/- by the CIT(A). The Tribunal referred to the Special Bench decision in ACIT vs. Vireet Investment Pvt. Ltd., which held that disallowances under Section 14A cannot be applied when computing book profit under Section 115JB. However, it acknowledged that some disallowance related to exempt income is necessary under clause (f) of Explanation 1 to Section 115JB. The Tribunal directed an ad-hoc disallowance of 1% of the exempted income, ensuring it does not exceed the disallowance made under Section 14A. Thus, the appeal was partly allowed on this ground.

4. Disallowance of Delayed Employee’s Contribution under Section 36(1)(va):

The assessee admitted to the delay in depositing employee contributions to Provident Fund and ESIC. The Tribunal upheld the disallowance, referencing the Gujarat High Court decision in CIT vs. GSRTC, which mandates that such contributions must be deposited on or before the due date specified in the Explanation to Section 36(1)(va). Therefore, the appeal on this ground was dismissed.

Conclusion:

The Tribunal's order resulted in the following outcomes:
- The appeal on the disallowance of interest expenses under Section 40A(2) was allowed.
- The appeal on the disallowance under Section 14A was partly allowed, with interest disallowance deleted and administrative expenses confirmed.
- The appeal on the addition to book profit under Section 115JB was partly allowed, with an ad-hoc disallowance of 1% of exempt income.
- The appeal on the disallowance of delayed employee contributions under Section 36(1)(va) was dismissed.

Order Pronouncement:

The order was pronounced beyond the usual 90-day period due to the unprecedented COVID-19 lockdown, following the principles laid out by the Mumbai Tribunal in a similar case. The appeal was partly allowed as per the detailed judgment.