2023 (10) TMI 22 - AT - Income Tax

Disallowance u/s 14A - assessee is disputing the computation of disallowance under second and third limb - HELD THAT - As regards the interest disallowance we notice that the assessee has given a breakup of the available interest-bearing funds received as unsecured loan and loans from Axis Bank which is stated to be Rs. 9.04 Cr and out of this application of the fund to the tune of Rs. 5.26 Cr are towards the business assets and Rs. 3.77 Cr approx towards non-business assets. During the course of hearing, assessee stated that the assessee is ready to admit the disallowance of interest expenditure of Rs. 47,08,373/- calculated at the rate of 12.5% of the funds applied for non-business assets at Rs. 3.77 Cr. Since the non-business assets inter-alia includes the investments in shares and other investments there remains no justification to make interest disallowance u/s 14A of the Act separately. We, therefore, delete the interest disallowance made under Rule 8D(2)(ii) of the I.T. Rules, 1962. Interest disallowance under the third limb calculated at the rate of 0.5% of the average investment assessee stated that only the investments fetching exempt income should be considered for the purpose of calculating 0.5% disallowance. The details of the same has been placed as per which the average investment fetching exempt income is shown at Rs. 3.66 Cr. Remaining investments are either in mutual funds or other investments which do not fetch exempt income. Thus, applying the rate of 0.5% on the average investment yielding exempt income of Rs. 3.66 Cr, the disallowance under third limb would work out to Rs. 1,83,000/-. Disallowance u/s 14A stands confirmed partly. Alternate claim made by the assessee wherein it has been contended that disallowance u/s 14A of the Act cannot exceed the exempt income - As we fail to find any merit in this ground because assessee has stated that exempt income during the year is only Rs. 6,70,100/- being the dividend earned on the exempt income but he failed to take note of the fact that exempt income also comprises of long term capital gain from sale of equity shares at Rs. 4,85,822/- exempt u/s 10(38) of the Act, dividend income at Rs. 12,96,867/- and PPF interest at Rs. 92,372/-. Therefore, this alternate ground no. 6 raised by the assessee is dismissed. Disallowance of interest expenditure u/s 36(1)(iii) - From perusal of the sheet, we notice that out of the interest-bearing funds of Rs. 9.04 Cr (approx.) assessee has applied Rs. 3.77 Cr for non-business assets. Even if we take the highest rate of interest which in this case has been charged by M/s. Morgan Stanley India Capital Pvt. Ltd. on the loan given to the assessee i.e. 12.5% and if applied on the annual basis on the funds employed for non-business assets purposes, the interest expenditure will work out to Rs. 47,08,373/-. The non-business assets include the investment in shares, ICICI Prudential Life Insurance, PPF, increase in interest free loans and advances and repayment of interest free unsecured loan. We, therefore under the given facts and circumstances of the case are of the considered view that against the interest disallowance of Rs. 1,58,99,942/- confirmed by ld. CIT(A), we, on the basis of the details available on records and the application of interest-bearing funds to non-business assets, sustain the disallowance of interest expenditure u/s 36(1)(iii) of the Act at Rs. 47,08,373/- and partly allow ground no. 2 raised by the assessee.

Summary

Issues Involved:
1. Disallowance of interest and expenses under Section 14A of the Income Tax Act.
2. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.

Summary:

Issue 1: Disallowance of Interest and Expenses under Section 14A
The assessee challenged the disallowance of interest and expenses under Section 14A of the Income Tax Act, arguing that the majority of investments were from the assessee's own capital and interest-free loans, with only a small portion from borrowed loans. The Tribunal noted that the Assessing Officer (AO) computed the disallowance at Rs. 17,03,930/- under Rule 8D of the Income Tax Rules, 1962. The assessee contended that only investments yielding exempt income should be considered for disallowance. The Tribunal observed that the interest disallowance of Rs. 15,87,650/- was unjustified since the non-business assets included investments in shares. The Tribunal deleted this interest disallowance and confirmed the disallowance under the third limb at Rs. 1,83,000/-, resulting in a total confirmed disallowance of Rs. 2,22,864/-. The alternate claim that disallowance cannot exceed exempt income was dismissed as the assessee failed to consider all exempt income components.

Issue 2: Disallowance of Interest under Section 36(1)(iii)
The assessee contested the disallowance of Rs. 1,58,99,942/- interest under Section 36(1)(iii), arguing that the funds withdrawn from the sole proprietorship were used for both business and non-business purposes. The Tribunal noted that the AO partially correctly identified the debit balance in the sole proprietorship but failed to recognize its application in the share trading business. The Tribunal, based on the details provided, sustained the interest disallowance at Rs. 47,08,373/- instead of Rs. 1,58,99,942/-, considering the interest-bearing funds applied to non-business assets.

Conclusion:
The appeal was partly allowed, with the Tribunal reducing the disallowance under both Sections 14A and 36(1)(iii). The disallowance under Section 14A was confirmed at Rs. 2,22,864/-, and the interest disallowance under Section 36(1)(iii) was sustained at Rs. 47,08,373/-.