2012 (12) TMI 728 - AT - Income Tax

Tribunal partially allows Revenue's appeal, upholds disallowance under Section 36(1)(iii) & restores disallowance under Section 14A

The Tribunal partly allowed the appeal by the Revenue. It upheld the deletion of the disallowance under Section 36(1)(iii) but restored the disallowance ... Disallowance of interest u/s 36 - There was a debit balance throughout the year and there was opening debit balance and even on closing of the year there was a debit balance - Assessee has in fact made purchases of Rs. 5.40 crores and even sales have been made at Rs. 3.10 crores – Held that:- As concluding from the fact of the case assessee had made regular business dealings and the amounts going into debit are on account of sales when the assessee was doing business with the sister concern then it is natural that some time account may be in debit. Addition deleted. In favour of assessee Disallowance of expense u/s 14A – Expense incurred in relation to earn exempt income – Assessee has incurred interest expenses whereas income from investments was found to be exempt - Held that:- As the disallowance u/s 14A is based on Rule 8D which has been noted above was applicable during the year under consideration and which is in consonance with the decision of Godrej and Boyce Manufacturing Co. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT). Therefore, restore that of the AO by confirming the disallowance u/s 14A rule 8D of IT Rules is applicable in the year before us and disallowance has been worked out as per Rule 8D. Issue remand back to AO in favour of assessee Issues Involved:1. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act.2. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.Issue-wise Detailed Analysis:1. Disallowance of Interest under Section 36(1)(iii):The Revenue contended that the CIT(A)-II, Ludhiana erred in deleting the disallowance of Rs. 6,19,626/- made under Section 36(1)(iii) of the Income Tax Act. The Assessing Officer (AO) had observed that the assessee advanced amounts to M/s Jai Durga Paper Mills Pvt Ltd, which remained in debit throughout the year. The AO disallowed the interest, citing that the funds were diverted to an interest-free loan to a sister concern, referencing the decision in CIT v. Abhishek Industries.The CIT(A) reversed the AO's decision, noting that the advances were part of regular business transactions, substantiated by significant purchases and sales between the assessee and M/s Jai Durga Paper Mills Pvt Ltd. The CIT(A) emphasized that the AO cannot dictate business decisions and noted that the advances were adjusted against supplies, invoking the principle of commercial expediency as upheld by the Supreme Court in S.A. Builders.The Tribunal upheld the CIT(A)'s decision, finding that the transactions were indeed regular business dealings and the decision in CIT v. Abhishek Industries was not applicable. The Tribunal confirmed that no disallowance of interest was warranted under Section 36(1)(iii).2. Disallowance under Section 14A read with Rule 8D:The Revenue argued that the CIT(A)-II, Ludhiana erred in deleting the disallowance of Rs. 4,75,974/- made under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules. The AO noted that the assessee made investments generating exempt income and incurred interest expenses, thus invoking Section 14A and Rule 8D for disallowance.The CIT(A) deleted the addition, stating there was no nexus between the investments and the loan taken by the assessee, referencing the decision in CIT v. Hero Cycles Ltd.The Tribunal, however, noted that Rule 8D was applicable for the assessment year 2008-09, as established in the case of Godrej and Boyce Manufacturing Co. Ltd v. DCIT. The Tribunal highlighted that the assessee did not demonstrate that interest-free funds were available for the investments, and the combined fund in the current account justified the apportionment of expenses.The Tribunal referenced the Supreme Court's decision in CIT v. Walfort Share and Stock Brokers P Ltd, affirming the theory of apportionment of expenses between taxable and non-taxable income. The Tribunal concluded that the disallowance under Section 14A, based on Rule 8D, was justified and restored the AO's order, setting aside the CIT(A)'s decision.Conclusion:The appeal by the Revenue was partly allowed. The Tribunal upheld the CIT(A)'s deletion of the disallowance under Section 36(1)(iii) but restored the AO's disallowance under Section 14A read with Rule 8D, confirming the applicability of Rule 8D for the relevant assessment year.