2016 (3) TMI 724 - AT - Income Tax

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

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 ... Disallowance made under Section 14A on account of indirect administrative expenses under Rule 8D(2)(iii) - Held that:- There is no movement in the investment portfolio except ₹ 20,000 which too in NSC. Accordingly when there is no movement in the investment portfolio, then, we are in agreement with the claim of the assessee that there is no expenditure incurred by the assessee on account of indirect expenditure for earning the dividend income. Even otherwise while applying the provisions of section 14A and computing the quantum of disallowance under Rule 8D(2)(iii), it cannot exceed the amount which is attributable for the earning the exempt income. Since the formula given in the Rule 8D does not recognize the actual expenditure incurred by the assessee but it calculates the disallowance being 0.5% of the average investment therefore, this computation of disallowance cannot disregard and over ride the actual expenditure attributable for earning the exempt income. Accordingly, we set aside the orders of the authorities below on this issue and delete the disallowance made by the Assessing Officer on account of indirect expenditure under section 14A by applying Rule 8D(2)(iii). - Decided in favour of assessee Disallowance under section 36(1)(iii) being interest calculated at the rate of 10% on the increase in work-in-progress - Held that:- When there is no dispute that the interest expenditure was incurred by the assessee on the term loan used for expansion of its business, then the same cannot be allowed as revenue expenditure but has to be capitalized as cost of the expansion being part of the work in progress. Accordingly, we do not find any error or illegality in the orders of authorities below on this issue. - Decided against assessee Disallowance of interest attributable to the diverted fund to the related parties by invoking the provisions of Section 40A(2) - Provisions of section 40A(2) invoked and a proportionate disallowance of interest expenditure made - Held that:- We find that when there is no fresh investment during the year under consideration therefore, in view of our finding on this issue in the earlier assessment years, we do not find any error or illegality in the order of the CIT (Appeals) who has recorded that the assessee's own funds are more than ₹ 220 Crores. There is no dispute on this fact that the assessee's own fund as recorded by the CIT (Appeals) amounting to ₹ 220.52 Crores. Therefore, this amount covers the disallowance made by the Assessing Officer by applying the provisions of section 40A(2) of the Act. Accordingly in view of our finding in the appeals for the earlier assessment years, we do not find any error or illegality in the order of the CIT (Appeals) in deleting the disallowance made by the Assessing Officer on account of interest expenditure under Section 14A as well as under Section 40A(2) of the Act. It is pertinent to note that during the year under consideration the interest free advance to the sister concerns are shown at ₹ 128.11 Crores which again is a reduction in the amount of advance to the related parties from the earlier years. Therefore when the assessee was having its own sufficient funds of more than ₹ 220 Crores which covers the advance given to the related parties, then the Assessing Officer is not justified in invoking the provisions of section 40A(2) of the Act in making the disallowance of interest expenditure - Decided against revenue 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).