2024 (1) TMI 108 - AT - Income Tax

Disallowance of interest expenses - sufficiency of own interest free funds - HELD THAT - Assessee had interest free funds of Rs. 28,40,84,158/- against which it has advanced money to the extent of Rs. 26,15,95,884/- which is less than the interest free funds available with the assessee. A.O. has ignored the fact that the amount given as advances to Jaihind Projects Ltd. (JPL) in the nature of share investment and not in the nature of loans and advances. The assessee company has made strategic investment in JPL and as per the terms of lenders and the Corporate Debt Restructuring Package approved by the CDR cell which is governed by Reserve Bank of India, the assessee made further share investment. A.O. only considered that amount invested is to be disallowed. CIT(A) held that the funds given to JPL were as per the requirement of lending banks to infuse funds by promoters in the JPL which is business expediency to give the funds to JPL without interest. The above investments were converted into equity shares, in view of the same, the disallowance made u/s. 36(1)(iii) of the Act is not justified relying upon case of Gujarat Narmada Valley Fertilizers Co. Ltd. 2013 (5) TMI 759 - GUJARAT HIGH COURT and S.A. Builders 2004 (5) TMI 50 - PUNJAB AND HARYANA HIGH COURT However the Ld. CIT(A) has agreed with the remaining interest payments are for non-business purposes and thereby confirmed the disallowance made u/s. 36(1)(iii) - No infirmity in the above finding of the Ld. CIT(A) and the Revenue could not place any material on record in substantiating its ground before us. Therefore Ground No. 1 raised by the Revenue is hereby dismissed. Disallowance u/s 14A - As admitted fact that the assessee has not received any dividend income against the investments made by it. Therefore the Ld. CIT(A) following judgment in the case of CIT vs. Corrtech Energy Pvt. Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT held that no disallowance u/s. 14A should be made and deleted the addition made by the A.O. It is further seen that the Ld. CIT(A) has followed Co-ordinate Bench of this Tribunal following Gujarat High Court Judgment of Corrtech Energy Pvt. Ltd. as well as other High Court judgments on this issue. We do not find any infirmity in the order passed by the Ld. CIT(A). Thus this Ground No. 2 raised by the Revenue is devoid of merits and the same is rejected.

Summary

Issues Involved:
1. Disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act, 1961.
2. Disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961.

Summary:

Issue 1: Disallowance of Interest Expenses under Section 36(1)(iii)

The Revenue appealed against the appellate order which restricted the disallowance of interest expenses from Rs. 2,61,90,163 to Rs. 16,05,213. The assessee, a company engaged in manufacturing and trading of metal equipment, had advanced Rs. 26,15,95,884 to Jaihind Projects Ltd. (JPL) from its interest-free funds of Rs. 28,40,84,158. The CIT(A) found the advances were for strategic investment and business expediency as required by the lending banks under the Corporate Debt Restructuring Package approved by the Reserve Bank of India. The CIT(A) held that the funds given to JPL were not in the nature of loans and advances but were to be converted into equity investment, thus not disallowable under Section 36(1)(iii). However, disallowance of Rs. 16,05,213 was confirmed for non-business purposes. The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the restriction of disallowance.

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

The CIT(A) deleted the disallowance of Rs. 29,85,830 made under Section 14A read with Rule 8D, as the assessee did not earn any exempt income during the year. The CIT(A) relied on the Gujarat High Court's decision in CIT vs. Corrtech Energy Pvt. Ltd., which held that no disallowance under Section 14A is warranted if no exempt income is earned. The Tribunal affirmed the CIT(A)'s decision, noting that the Revenue could not provide any contrary material or distinguish the findings. The Tribunal found no merit in the Revenue's appeal on this ground.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The disallowance of interest expenses was restricted to Rs. 16,05,213, and the disallowance under Section 14A read with Rule 8D was deleted due to the absence of exempt income.