HC upholds deletion of interest expense disallowance under Sec 14A and TDS disallowance under Sec 40(a)(ia)

PRINCIPAL COMMISSIONER OF INCOME-TAX Versus INDIA GELATINE AND CHEMICALS LTD.

PRINCIPAL COMMISSIONER OF INCOME-TAX Versus INDIA GELATINE AND CHEMICALS LTD. - [2015] 376 ITR 553 (Guj) Issues Involved:
1. Deletion of disallowance of interest expenses under section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962.
2. Deletion of disallowance made under section 40(a)(ia) of the Income-tax Act for non-deduction of TDS on overseas freight.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Interest Expenses under Section 14A read with Rule 8D:

The Assessing Officer (AO) disallowed Rs. 12,06,934 under section 14A of the Income-tax Act, 1961, as the assessee could not justify that the investments made in shares and mutual funds amounting to Rs. 21,14,07,850 were from interest-free funds. The AO observed that the assessee paid interest expenses of Rs. 40,10,861 and disallowed Rs. 14,06,934, restricting the effective disallowance to Rs. 12,06,934 after considering the assessee's suo motu disallowance of Rs. 2,00,000.

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, but confirmed the disallowance of Rs. 6,22,228 for administrative and calculation charges.

Both the assessee and the Revenue appealed to the Income-tax Appellate Tribunal (ITAT). The ITAT allowed the assessee's appeal, deleting the entire disallowance of Rs. 12,06,934, and dismissed the Revenue's appeal.

The High Court agreed with the ITAT's findings, noting that both the CIT(A) and ITAT found that the assessee had sufficient interest-free funds to make the investments. The court referred to the ITAT's observations:

"The assessee had borrowed funds for specific purposes (vehicle and captive power plant), and no borrowed funds were used for non-business purposes. The CIT(A) noted that the assessee earned interest income from associated concerns and held that the disallowance under section 36(1)(iii) was not justified."

The court also noted the ITAT's reliance on the Delhi High Court's decision in CIT v. Consolidated Photo and Finvest Ltd., which supported the assessee's computation of disallowance.

The High Court confirmed the ITAT's judgment, stating that the AO's disallowance under section 14A was based on the incorrect assumption that the investments were not made from interest-free funds. The court also dismissed the Revenue's reliance on the Bombay High Court's decision in Godrej and Boyce Mfg. Co. Ltd. v. Deputy CIT, as it was not applicable to the facts of the case.

2. Deletion of Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Overseas Freight:

The AO disallowed Rs. 1,02,43,720 under section 40(a)(ia) for non-deduction of TDS on overseas freight. The CIT(A) deleted the entire disallowance, and the ITAT confirmed this deletion.

The High Court noted that as per section 172 of the Act, payments made to non-resident shipping companies are not covered under sections 194C or 194 of the Act. It was undisputed that the amount was paid to a non-resident shipping company.

The court agreed with the ITAT's decision, stating that the disallowance under section 40(a)(ia) was not justified as the provisions of section 172 applied, and the non-resident shipping company was not required to file a return under section 172.

Conclusion:

The High Court found no error in the ITAT's judgment and dismissed both tax appeals, confirming the deletion of disallowances under sections 14A and 40(a)(ia) of the Income-tax Act.