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2020 (12) TMI 524 - AT - Income TaxAddition u/s. 14A r.w.r. 8D - Addition on account of interest made by AO - HELD THAT - The assessee thus had sufficient own funds available at the relevant time to make the said investment and there was a presumption that the said investment was made by the assessee company out of its own free funds as held in the case of CIT vs. Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT The investment capable of earning exempt income thus was entirely made by the assessee-company out of its own free funds and there being no utilization of interest bearing borrowed funds for making the said investment, we find merit in the contention of the ld. Counsel for the assessee that disallowance on account of interest made by the Assessing Officer u/s. 14A and sustained by the ld. CIT(A) is liable to be deleted. Disallowance made by the Assessing Officer and confirmed by the ld. CIT(A) on account of other common expenses by applying Rule 8D(2)(iii) - We direct the Assessing Officer to re-compute the disallowance to be made u/s. 14A of the Act by applying Rule 8D(2)(iii) of the Rules on account of other common expenses by taking into consideration only those investments on which exempt income was actually earned by the assessee during the year under consideration. Ground no. 1 and 2 of the assessee's appeal are thus partly allowed. Disallowance of interest - business expediency of the investment made by the assessee in the debentures of M/s. Kunal Spaces Pvt. Ltd. was not established - HELD THAT - As sufficient own funds in the form of share capital and free reserves to the tune of ₹ 30.73 crores were available with the assessee-company at the relevant time and the same being sufficient to make the entire investments including the investment made by the assessee-company in the debentures of M/s. Kunal Spaces Pvt. Ltd., we are of the view that no disallowance on account of interest as made by the Assessing Officer and sustained by the ld. CIT(A) was called for as there was no case of utilization or diversion of the interest bearing loan borrowed by the assessee-company for non-business purpose. In that view of the matter, we delete the disallowance made by the Assessing Officer and sustained by the ld. CIT(A) on account of interest and allow ground no. 2 of the assessee's appeal. Addition on account of director's remuneration - as noticed by AO that there was increase of director's remuneration by ₹ 3 lakhs during the year under consideration as compared to the immediately preceding assessment year - HELD THAT - Remuneration paid by the assessee-company to its directors during the year under consideration was duly justified by the assessee-company with reference to their qualification and experience as well as the services rendered to the assessee-company and without bringing on record anything to show that the remuneration so paid by the assessee-company to its directors was excessive or unreasonable, the authorities below were not justified to make a disallowance of ₹ 3 lakhs on account of director's remuneration simply because there was an increase of 20% while the other expenditure incurred by the assessee-company had declined. We also find that there is nothing brought on record by the authorities below to show that the increase of 20% in the director's remuneration was excessive or unreasonable so as to disallow the same. We, therefore, find no justification in the disallowance made - Decided in favour of assessee. Disallowance of rental expenses - DR has contended that this claim now being made on behalf of the assessee regarding the total area of 7500 sq.ft. taken on rent requires verification since the same is contrary to the finding recorded by the authorities below in this regard - HELD THAT - We find merit in the contention of the ld. DR and since the ld. Counsel for the assessee has not raised any objection for sending the matter back to the Assessing Officer for proper verification, we restore this issue to the file of the Assessing Officer for deciding the same afresh after verifying the claim of the assessee regarding the actual area taken on the rent for its office premises. Appeal of the assessee is partly allowed.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962. 2. Disallowance of interest on loans. 3. Disallowance of director's remuneration. 4. Disallowance of rental expenses. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D: The assessee, a company engaged in the business of Promoters and Builders, filed a return declaring a total income at Nil, claiming exemption on dividend income and share of profit from a partnership firm. The Assessing Officer (AO) made a disallowance of ?24,67,350/- under Section 14A read with Rule 8D, which was sustained by the CIT(A) to the extent of ?16,64,256/-. The AO worked out the interest expenses and other common expenses incurred in relation to the earning of exempt income. The CIT(A) upheld the disallowance in principle due to the assessee's maintenance of mixed funds but corrected the quantum of disallowance. Upon review, the Tribunal found that the assessee had sufficient own funds to make the investments, thereby presuming that the investments were made out of free funds as held in CIT vs. Reliance Utilities and Power Ltd. Consequently, the disallowance on account of interest was deleted. However, for other common expenses, the Tribunal directed the AO to re-compute the disallowance by considering only those investments that actually fetched exempt income during the year, partly allowing the assessee's appeal. 2. Disallowance of Interest on Loans: The AO disallowed ?30,23,059/- as interest on loans, asserting that the assessee could have utilized the funds invested in debentures to avoid interest payments. The CIT(A) confirmed the disallowance but restricted it to ?22,17,414/-, considering the sustained disallowance under Section 14A. The Tribunal, noting that the assessee had sufficient own funds to cover the investments, ruled that there was no utilization or diversion of interest-bearing loans for non-business purposes. Therefore, the disallowance on account of interest was deleted, allowing the assessee's appeal. 3. Disallowance of Director's Remuneration: The AO disallowed ?3 lakhs out of director's remuneration, citing a 20% increase without proper justification amidst a decline in overall expenditure. The CIT(A) confirmed this disallowance. The Tribunal found that the remuneration was justified based on the directors' qualifications, experience, and services rendered. Without evidence showing the remuneration was excessive or unreasonable, the disallowance was deemed unjustified. Thus, the Tribunal deleted the disallowance, allowing the assessee's appeal. 4. Disallowance of Rental Expenses: The AO disallowed ?9 lakhs out of rental expenses, considering the rent paid for the office premises excessive. The CIT(A) sustained the disallowance to the extent of ?7,14,202/-, including municipal taxes. The Tribunal noted the assessee's claim that the actual area taken on rent was 7500 sq.ft. and not 5000 sq.ft. as considered by the authorities below. Given the potential for confusion, the Tribunal remanded the issue back to the AO for verification of the actual area taken on rent. The appeal on this ground was thus treated as allowed for verification purposes. Conclusion: The appeal was partly allowed, with the Tribunal providing relief on several disallowances while remanding one issue for further verification. The order was pronounced on September 24, 2020.
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