2020 (11) TMI 260 - AT - Income Tax

Disallowance of interest expenses - assessee has not charged any interest in respect of advance given to the wife of the one of the key personnel of the company - CIT(A) has restricted the disallowance of interest on loan given to the employee of the wife to the extent of 11.5% as against disallowance of 15% made by the AO - HELD THAT - As decided in own case 2016 (12) TMI 1833 - ITAT AHMEDABAD where interest-free own funds available to the assessee are far in excess of the interest-free advance, the presumption would arise in favour of assessee that the advances were made from interest-free funds available with the assessee - In view of the huge funds available with the assessee without any interest liability, we find that the issue is squarely covered in favour of assessee. Enhanced disallowance u/s. 14A r.w.r. 8D - CIT(A) has enhanced the disallowance stating that borrowed funds were directly related to the investment made for earning exempt income - HELD THAT - As perused the decision of Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT wherein it is held that if there be interest free funds available to an assessee sufficient to meet its investment and at the same time the assessee had raised a loan it can be presumed that the investment were from the interest free funds available. The assessee had demonstrated from the above referred copies of annual accounts that it was having substantial amount of interest free funds of ₹ 25.67 crores as against investment of ₹ 2.70 crore. - we consider that incurring of administrative expenses i.e. cost of employee, office expenses etc. to manage the investment cannot be ruled out therefore we restrict the disallowance to the extent of administrative expenses of ₹ 85,923/- as computed by the Assessing Officer. Accordingly, this ground of appeal of the assessee is partly allowed.

Summary

Issues:
1. Disallowance of interest expenses of ?6,59,425
2. Enhanced disallowance of ?14,36,931 under section 14A

Issue 1: Disallowance of interest expenses of ?6,59,425
The Assessing Officer disallowed interest expenses of ?6,59,425 as the assessee did not charge interest on an advance given to an employee's wife, considering it not for business expediency. The CIT(A) confirmed the disallowance at 11.5% instead of 15% as charged by the Assessing Officer. The appellant cited a Co-ordinate Bench decision where it was held that interest-free advances to staff are common in corporate settings, and the disallowance was unjustified due to substantial interest-free funds available. The Tribunal agreed with the appellant, noting the excess interest-free funds and allowed the appeal based on the Co-ordinate Bench's decision.

Issue 2: Enhanced disallowance of ?14,36,931 under section 14A
The Assessing Officer disallowed ?1,54,816 under section 14A, but the CIT(A) increased it to ?14,36,931, attributing borrowed funds to investments for earning exempt income. The appellant argued that substantial interest-free funds were available against minimal investments, citing legal precedents. The Tribunal observed the substantial interest-free funds and investments, referencing a Bombay High Court decision. It concluded that administrative expenses related to managing investments should be considered, limiting the disallowance to ?85,923, partially allowing the appeal.

In conclusion, the Tribunal partly allowed the appellant's appeal concerning the disallowance of interest expenses and the enhanced disallowance under section 14A, based on the availability of interest-free funds and legal precedents cited by the appellant.