2024 (7) TMI 1376 - AT - Income Tax

Addition u/s 14A - Addition of interest expenditure - Admissibility of deduction of expenditure incurred in earning exempt income - HELD THAT - CIT(A) as well the assessing authority has not brought any material suggesting that the interest free funds were diverted for earning of tax free income. Under these facts, the disallowance made in respect of interest expenditure is not justified. Moreover, the AO and Ld. CIT(A) did not advert to the submissions of the assessee that bank charges and bank guarantee charges do not partake character of interest and had been wrongly included as interest while making disallowance u/s 14A of the Act. We therefore, respectfully following the judgement of Godrej Boyce Mfg. Company Ltd 2017 (5) TMI 403 - SUPREME COURT hereby delete the impugned disallowance made u/s 14A of the Act in respect of interest expenditure. Thus, grounds of the assessee s appeal are allowed.

Issues:
1. Disallowance under Section 14A of the Act read with Rule 8D(2)(ii)
2. Investment in partnership firm out of surplus non-interest bearing funds
3. Inclusion of bank charges and bank guarantee charges as interest on borrowings for disallowance u/s 14A
4. Reduction of interest earnings from gross amount of interest charged by the bank for disallowance u/s 14A/Rule 8D(ii)

Analysis:

Issue 1: Disallowance under Section 14A of the Act read with Rule 8D(2)(ii)
The assessee appealed against the disallowance of Rs. 9,06,947 made by the Assessing Officer under Section 14A. The Assessing Officer invoked Rule 8D for disallowance related to investments in a partnership firm. The CIT(A) upheld the addition, stating that the bank charges and bank guarantee charges are part of interest. The appellant argued that no disallowance should have been made as it had sufficient interest-free funds. The Tribunal held that the disallowance of interest expenditure was not justified as there was no evidence of diversion of interest-free funds for earning tax-free income. Citing the case law, the Tribunal deleted the disallowance, allowing the appeal.

Issue 2: Investment in partnership firm out of surplus non-interest bearing funds
The appellant contended that the investment in the partnership firm was made out of surplus non-interest bearing funds available with the company. The Assessing Officer did not accept this contention and proceeded with the disallowance. The CIT(A) also rejected this argument. However, the Tribunal found that there was no evidence of diversion of interest-free funds for earning tax-free income, leading to the deletion of the disallowance.

Issue 3: Inclusion of bank charges and bank guarantee charges as interest on borrowings for disallowance u/s 14A
The dispute arose regarding the inclusion of bank charges and bank guarantee charges as interest on borrowings for the purpose of disallowance under Section 14A. The appellant argued that these charges should not be considered as interest. Both the Assessing Officer and the CIT(A) upheld the inclusion. However, the Tribunal found that these charges do not partake character of interest and were wrongly included in the disallowance, leading to the deletion of the disallowance.

Issue 4: Reduction of interest earnings from gross amount of interest charged by the bank for disallowance u/s 14A/Rule 8D(ii)
The appellant contended that interest earnings should be reduced from the gross amount of interest charged by the bank for working out the disallowance under Section 14A/Rule 8D(ii). The Tribunal did not specifically address this contention but focused on the lack of evidence of diversion of interest-free funds for earning tax-free income, leading to the deletion of the disallowance.

In conclusion, the Tribunal allowed the appeal, deleting the impugned disallowance made under Section 14A of the Act in respect of interest expenditure, based on the lack of evidence of diversion of interest-free funds for earning tax-free income.

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