2013 (7) TMI 1198 - AT - Income Tax

Tribunal upholds CIT(A) decision on interest disallowance under Income Tax Act

The Tribunal upheld the CIT(A)'s decision to delete the disallowance of interest under Section 36(1)(iii) and Section 14A of the Income Tax Act. It was ... - Issues Involved:1. Deletion of disallowance of interest liability amounting to Rs.9,29,911/- u/s 36(1)(iii) of the I.T Act.2. Deletion of disallowance of interest liability amounting to Rs.24,261/- by invoking the provisions of Section 14A of the I.T Act.Summary:Issue No. 1:The assessee, engaged in manufacturing/fabricating engineering capital goods, made investments in land and work-in-progress for building and machinery. The AO disallowed interest of Rs.9,29,911/- on the grounds that the investments were made from interest-bearing funds not used for business purposes. The CIT(A) deleted this disallowance, and the revenue appealed.The Tribunal found that the assessee had not made specific borrowings for these investments and had used a mixed CC Account, which also included business profits. The Tribunal noted that substantial profits were generated during the year, and the investments were made from these profits and recoveries from debtors. The Tribunal relied on several judicial precedents, including the Hon'ble Supreme Court's decision in ACIT Vs. Elecnon Engineering Company Limited and the Hon'ble Mumbai High Court's decision in Reliance Utilities and Power Ltd, which support the view that if interest-free funds are available, it can be presumed that investments were made from these funds.The Tribunal upheld the CIT(A)'s decision, concluding that the disallowance of interest was not justified as the investments were made from the profits and internal accruals, not borrowed funds.Issue No. 2:The AO disallowed interest of Rs.24,261/- u/s 14A, arguing that the assessee made investments in mutual funds, which generate exempt income. The CIT(A) deleted this disallowance, and the revenue appealed.The Tribunal upheld the CIT(A)'s decision, noting that the establishment of a nexus between borrowed funds and investments generating exempt income is a prerequisite for disallowance. The Tribunal cited judicial precedents, including the Hon'ble P&H High Court's decision in Hero Cycles Ltd and the Hon'ble Supreme Court's decision in Munjal Sales Corporation, which support the view that no disallowance can be made if the investments are less than the internal accruals and profits earned.The Tribunal concluded that the AO was not justified in invoking Section 14A and disallowing the interest, thus upholding the CIT(A)'s deletion of the addition.Conclusion:The appeal was dismissed, and the order pronounced in the open court on 19th July 2013.