2015 (4) TMI 1311 - AT - Income Tax

Tribunal allows interest expenses, restricts disallowance under Sections 36(1)(iii) and 14A

Deputy Commissioner of Income-tax Circle -11, Ahmedabad Versus M/s. Shree Laxmi Bidi Trading Co. And Vice-Versa

The Tribunal upheld the CIT(A)'s decision, allowing the interest expenses under Section 36(1)(iii) for both AY 2010-11 and AY 2011-12. The Tribunal ... Disallowance of interest u/s 36(1)(iii) - HELD THAT:- As relying on own case [2013 (11) TMI 1599 - ITAT AHMEDABAD] While considering the claim u/s. 36(1)(iii) what is to be required to judge is whether the amount is borrowed for the purpose of business or not. Since the amount has been borrowed in earlier years as well as during the year at a stipulated rate of interest and which has been still utilized for the purpose of business, the interest rate could not have been re-negotiated for earlier year. Therefore, rate of interest, paid by the assessee is quite reasonable having regard to the fair market value of such services. Therefore, the CIT(A) was incorrect in restricting the interest payable to the extent of 15% or 14% which is supported by various decisions mentioned in the order in preceding paras. Since the interest rate paid by the assessee is reasonable, the order of the CIT(A) is reversed and addition is deleted. Thus, assessee’s appeals are allowed and Revenue’s appeals are dismissed on this ground. Disallowance u/s.14A - HELD THAT:- As relying on own case [2013 (11) TMI 1599 - ITAT AHMEDABAD] Tribunal has decided the issue in favour of assessee by placing reliance on the order of Co-ordinate Bench in case of Chudgar Ranchodlal Jethalal [2015 (4) TMI 437 - ITAT AHMEDABAD] for the proposition that disallowance u/s. 14A r.w. Rule 8D though is mandatory from A.Y. 2008-09 under no circumstances, should exceed quantum of exempt income. In view of above, Assessing Officer is directed to restrict the disallowance u/s. 14A r.w. Rule 8D should not exceed quantum of exempt income. As far as disallowance of administrative expenses is concerned, in absence of details of investments made during the year, number of transactions in those investments etc, this issue needs to be re-looked by Assessing Officer. So, in the interest of justice, we restore this issue to him with direction to decide in view of above discussion and in accordance with law after providing due opportunity of hearing to the 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.Detailed Analysis:1. Disallowance of Interest under Section 36(1)(iii):The primary issue raised by the Revenue was the disallowance of interest amounting to Rs. 2,06,12,163/- for AY 2010-11 and Rs. 2,59,61,548/- for AY 2011-12 under Section 36(1)(iii) of the Income Tax Act. The Assessing Officer (AO) had disallowed the interest expenses, but the CIT(A) allowed the appeal in favor of the assessee. The CIT(A) based their decision on the ITAT Ahmedabad 'B' Bench's earlier ruling, which stated that the interest rate paid by the assessee was reasonable and that the funds borrowed were utilized for business purposes.The Tribunal upheld the CIT(A)'s decision, noting that the borrowed funds were necessary for the business and were not diverted for non-business purposes. The Tribunal emphasized that the business needs should be judged from the perspective of the businessman and that the assessee had a significant business turnover, justifying the borrowing of funds. The Tribunal also referenced the Hon'ble Jurisdictional High Court's decision in the assessee's own case, which supported the reasonableness of the interest rate and the necessity of borrowing funds for business purposes.2. Disallowance under Section 14A:The second issue involved the disallowance under Section 14A, which pertains to expenses incurred in relation to income not includible in total income. For AY 2010-11, the AO disallowed Rs. 4,41,963/- and for AY 2011-12, Rs. 2,56,576/- under Section 14A. The CIT(A) confirmed these disallowances, but the assessee contested this decision, arguing that the disallowance should not exceed the quantum of exempt income.The Tribunal referred to the ITAT's earlier decisions and the Hon'ble Delhi High Court's ruling in Joint Investment Pvt. Ltd. vs. CIT, which stated that the disallowance under Section 14A should not exceed the exempt income. The Tribunal directed the AO to restrict the disallowance to the quantum of exempt income and to re-examine the administrative expenses related to the investments.Conclusion:The Tribunal dismissed the Revenue's appeals for both AY 2010-11 and AY 2011-12, upholding the CIT(A)'s decisions to allow the interest expenses under Section 36(1)(iii). The assessee's cross-objections regarding the disallowance under Section 14A were partly allowed, with directions to the AO to ensure the disallowance does not exceed the exempt income and to reassess the administrative expenses. The judgment was pronounced in open court on April 30, 2015.