2016 (3) TMI 724 - AT - Income Tax

Tribunal decision favors assessee for multiple assessment years due to AO errors in disallowances and capitalization.

M/s. KBD Sugars and Distilleries Ltd. Versus Asst. Commissioner of Income Tax, Circle 11 (5), Bangalore.

M/s. KBD Sugars and Distilleries Ltd. Versus Asst. Commissioner of Income Tax, Circle 11 (5), Bangalore. - TMI Issues Involved:1. Disallowance under Section 14A on account of indirect administrative expenses.2. Disallowance under Section 36(1)(iii) for interest on loans taken for business expansion.3. Disallowance under Section 40A(2) for interest-free advances to related parties.Issue-wise Detailed Analysis:1. Disallowance under Section 14A on account of indirect administrative expenses:The primary contention revolved around the disallowance made under Section 14A read with Rule 8D(2)(iii) concerning indirect administrative expenses. The assessee argued that no expenditure was incurred for earning dividend income, and there was no change in the investment portfolio during the year. The Tribunal noted that the Assessing Officer (AO) did not arrive at a proper satisfaction before applying Rule 8D(2)(iii), which is a mandatory requirement. The Tribunal emphasized that the AO must first identify the expenditure attributable to earning the exempt income before invoking Rule 8D. The Tribunal relied on previous decisions, including DCIT vs. Subramanya Constructions & Development Co. Ltd., to support this view. Consequently, the Tribunal deleted the disallowance made by the AO on account of indirect expenditure.2. Disallowance under Section 36(1)(iii) for interest on loans taken for business expansion:For the Assessment Year 2010-11, the AO disallowed interest on loans taken for business expansion, which was confirmed by the CIT (Appeals). The Tribunal upheld this disallowance, referencing the proviso to Section 36(1)(iii), which mandates the capitalization of interest on borrowed funds used for acquiring an asset or expanding the business until the asset is put to use. The Tribunal found no error in the orders of the authorities below on this issue and dismissed the assessee's appeal.3. Disallowance under Section 40A(2) for interest-free advances to related parties:The AO invoked Section 40A(2) to disallow interest expenditure on the grounds that interest-free advances were made to related parties. The CIT (Appeals) deleted this disallowance, noting that the assessee had sufficient interest-free funds to cover the advances. The Tribunal upheld this deletion, citing its own previous decisions in the assessee's case for earlier years, where it was established that the assessee had sufficient interest-free funds. The Tribunal also referenced the decision of the Hon'ble Supreme Court in the case of SA Builders, which supports the view that interest-free advances made out of sufficient interest-free funds do not warrant disallowance under Section 40A(2). Consequently, the Tribunal dismissed the revenue's appeal on this issue.Conclusion:The Tribunal allowed the assessee's appeals for the Assessment Years 2008-09 and 2009-10, partly allowed the appeal for Assessment Year 2010-11, and dismissed the revenue's appeals for all the assessment years. The Tribunal's decision was based on the lack of proper satisfaction recorded by the AO for disallowances under Section 14A, the mandatory capitalization of interest under Section 36(1)(iii), and the sufficiency of the assessee's interest-free funds concerning Section 40A(2).