2015 (5) TMI 276 - HC - Income Tax

High Court upholds Tribunal's decision on interest expenses & TDS disallowance under Income Tax Act

The High Court upheld the Tribunal's decision to delete the disallowance of interest expenses under Section 14A in its entirety, finding that the assessee ... Disallowance of the interest expenses under Section 14A r.w.r 8D - assessee soumoto disallowed the amount on adhoc basis - ITAT allowed claim - Held that:- We are in complete agreement with the view taken by the learned Tribunal and the reasons given by the learned Tribunal while deleting the disallowance of interest expenses under Section 14A of the Act as Assessing Officer as well as the Commissioner of Income Tax (Appeals) could not pinpoint any error in the computation of disallowance made by the assessee of ₹ 2,00,000/in earning tax free divided income. In the circumstances, in our considered opinion, disallowance of ₹ 6,22,228/could not have been made by the Assessing Officer and confirmed by the Commissioner of Income Tax (Appeals). View finds support from the decision of CIT vs. Consolidated Photo & Finvest Ltd. (2012 (7) TMI 312 - DELHI HIGH COURT ) - Decided in favour of assessee. Disallowance under Section 40(a)(ia) - non-deduction of TDS on overseas freight - ITAT deleting disallowance - Held that:- It is required to be noted that as per section 172 of the Act, payment made to the nonresident shipping company would not be covered in Sections 194C or 194 of the Act. At this stage it is required to be noted that it is not in dispute that the amount in question was infact paid to the nonresident shipping company. Under the circumstances, the learned Tribunal has rightly deleted the disallowance made by the AO under Section 40(a)(ia) of the Act. - Decided in favour of assessee. Issues Involved:1. Deletion of disallowance of interest expenditure under Section 14A read with Rule 8D.2. Deletion of disallowance under Section 40(a)(ia) for non-deduction of TDS on overseas freight.Detailed Analysis:1. Deletion of Disallowance of Interest Expenditure Under Section 14A Read with Rule 8D:The Revenue challenged the Tribunal's decision to delete the disallowance of interest expenses under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules. The Assessing Officer (AO) had disallowed Rs. 14,06,934 on the grounds that the assessee could not justify that the investments in shares and mutual funds amounting to Rs. 21,14,07,850 were made from interest-free funds. The AO observed that the assessee had paid interest on borrowed funds amounting to Rs. 40,10,861 and had not made disallowance of interest expenditure according to Section 14A read with Rule 8D. Consequently, the AO computed the proportionate disallowance of interest expenditure at Rs. 5,84,706 and disallowed the same.The Commissioner of Income Tax (Appeals) [CIT(A)] partly allowed the appeal, deleting Rs. 5,84,706 out of the disallowance of Rs. 12,06,934. The CIT(A) found that the assessee had sufficient interest-free funds to make the investments and that no borrowed funds were used for non-business purposes. The Tribunal upheld the CIT(A)'s decision, finding no error in the computation of disallowance made by the assessee of Rs. 2,00,000 for earning tax-free dividend income and deleted the disallowance of Rs. 6,22,228 made by the AO.The High Court agreed with the Tribunal's findings, noting that the AO made the disallowance solely on the ground that the assessee failed to justify that the investment was made out of interest-free funds. Both the CIT(A) and the Tribunal found that the assessee had sufficient interest-free funds. Therefore, the High Court confirmed the Tribunal's decision to delete the disallowance of interest expenses under Section 14A in its entirety.2. Deletion of Disallowance Under Section 40(a)(ia) for Non-Deduction of TDS on Overseas Freight:The Revenue also challenged the Tribunal's decision to delete the disallowance made under Section 40(a)(ia) of the Act for non-deduction of TDS on overseas freight. The AO had disallowed an amount of Rs. 1,02,43,720 for non-deduction of TDS on overseas freight. The CIT(A) deleted the entire disallowance, and the Tribunal upheld this decision.The High Court noted that as per Section 172 of the Act, payment made to a non-resident shipping company would not be covered under Sections 194C or 194 of the Act. It was undisputed that the amount in question was paid to a non-resident shipping company. Therefore, the Tribunal rightly deleted the disallowance made by the AO under Section 40(a)(ia) of the Act.Conclusion:The High Court found no error in the Tribunal's decision and dismissed both Tax Appeals, confirming that no substantial question of law arose in the present cases. The Tribunal's deletion of the disallowances under Sections 14A and 40(a)(ia) was upheld.