2021 (1) TMI 468 - AT - Income Tax

Disallowance u/s.14A - AO noticed that the assessee has earned dividend income but assessee has not disallowed any expenses for earning the exempt income u/s. 14A - HELD THAT - Since the assessee had sufficient own interest free funds no disallowance should have been made considering the interest. In so far as the disallowance of administrative expenses is concerned we find that the CIT(A) has restricted disallowance to the extent of the exempt income relying upon the decision of JOINT INVESTMENTS PVT LTD 2015 (3) TMI 155 - DELHI HIGH COURT . We are of the opinion that such disallowance is reasonable and need no interference. Ground No.1 is accordingly dismissed. Disallowance of interest u/s. 36 (1) (iii) - AO noticed that the assessee has given interest free advances to its sister concern and interest incurred by the assessee on the loans borrowed by it need to be proportionately disallowed - HELD THAT - On the first day of the accounting year the loans and advances were ₹ 15.70 crores and in the last day of the accounting year loans and advances have been reduced to ₹ 9.55 crores. This means that no fresh loans / advances were given during the year under consideration. Further the interest free funds available with the assessee is around ₹ 38 crores, therefore, it can be safely concluded that the loans and advances given to the sister concern have been given out of own interest free funds. On these facts no disallowance need to be made, we accordingly direct the AO to delete the addition.

Summary

Issues:
1. Disallowance u/s.14A for exempt income.
2. Disallowance of interest u/s. 36(1)(iii).

Issue 1: Disallowance u/s.14A for exempt income:
The appellant, engaged in share trading, earned dividend income of ?364,490 without disallowing any expenses for earning exempt income u/s. 14A. The AO computed disallowance at ?13.59 lakhs under rule 8D. The CIT(A) restricted the disallowance to the exempt income amount based on a Delhi High Court decision. The appellant argued no expenditure was incurred for earning exempt income, citing a previous Tribunal decision. The Tribunal held that since the assessee had sufficient own interest-free funds, no disallowance should have been made for interest. The disallowance of administrative expenses was limited to the exempt income amount, deemed reasonable based on the High Court decision. The Tribunal dismissed Ground No.1.

Issue 2: Disallowance of interest u/s. 36(1)(iii):
The AO disallowed ?33,15,127 as interest incurred by the assessee on loans borrowed due to interest-free advances to a sister concern. The CIT(A) upheld the disallowance. The Tribunal noted that no fresh loans were given during the year, and interest-free funds available were substantial. Thus, it concluded that loans to the sister concern were from own interest-free funds, directing the AO to delete the addition. Ground No.2 was allowed, and the appeal was partly allowed.

In conclusion, the Tribunal partially allowed the appeal, ruling in favor of the assessee on the disallowance of interest and limiting the disallowance u/s.14A to the exempt income amount, based on legal precedents and factual considerations.