2017 (4) TMI 808 - AT - Income Tax

ITAT Mumbai rules on disallowances under sections 14A and 36(1)(iii) of Income Tax Act

The Appellate Tribunal ITAT Mumbai addressed challenges to the order of the CIT (A)-17, Mumbai, regarding disallowances under sections 14A and 36(1)(iii) ... Disallowance u/s.14A - average value of investment after amalgamation - Held that:- Bombay High Court vide its order,dated 05/08/2001,had approved the scheme of amalgamation with effect from 01/04/2010, that in pursuance of the scheme three entities merged with the assessee company only on 01/04/2010 and not before that.It is a fact that NFIPL,AMMSPL and YFPL got amalgamated with the assessee from a particular date and the assessee had taken the balances of these entities for calculating the disallowance as per Rule 8D read with section 14A of the Act. In our opinion, the FAA had rightly held that investment in all the three companies would form the part of average value of investment contrary to the finding of the AO. As we do not find any legal or factual infirmity in his order,so,confirming the same,we decide the first ground of appeal against the AO. Disallowance of interest u/s.36(1) (iii) - Held that:- We find that assessee had advanced loan to AFL, that it had not charged any interest from AFL, that it had on its own disallowed ₹ 11,77,28,592/- on interest free loans given to various entities.Though in the books of accounts the assessee had written off ₹ 6.58 crores, but, in the statement of income it had not claimed the deduction. But, we find that there is need to make further verification about the position of interest free funds available with the assessee and interest free loan advanced by it.Therefore, in the interest of justice, we are restoring back he issue to the file of the AO for further verification. He is directed to afford a reasonable opportunity to the assessee. Second Ground is decided in favour of the AO, in part. Issues involved:1. Disallowance under section 14A of the Income Tax Act.2. Disallowance of interest under section 36(1)(iii) of the Act.Issue 1: Disallowance under section 14A of the Income Tax Act:The Appellate Tribunal ITAT Mumbai addressed the challenge to the order of the CIT (A)-17, Mumbai, by the assessee and the Assessing Officer (AO) through cross appeals. The assessee-company, engaged in training and commodities business, filed its return declaring income of Rs. 5.12 crores, later assessed at Rs. 8.55 crores by the AO. The AR stated that the assessee was not pursuing the first ground of appeal. An additional ground was filed by the assessee regarding disallowance under section 14A, which was admitted by the Tribunal as a legal issue. The FAA had deleted the disallowance made by the AO, considering the merger of three companies with the assessee. The Tribunal upheld the FAA's decision, emphasizing that the investment in all three companies should be part of the average value of investment. The first ground of appeal was decided against the AO.Issue 2: Disallowance of interest under section 36(1)(iii) of the Act:The AO disallowed interest expenditure of Rs. 28,23,052, stating it was not incurred exclusively for earning interest income. The FAA, however, deleted this disallowance, citing various legal precedents and the lack of nexus between the interest paid and unpaid by the assessee. The Tribunal found that the assessee had not claimed the written-off amount as a deduction, but further verification was needed on the interest-free funds and loans. Consequently, the issue was sent back to the AO for additional verification. The second ground was decided in part in favor of the AO.In summary, the Appellate Tribunal ITAT Mumbai addressed two main issues in this judgment: disallowance under section 14A of the Income Tax Act and the disallowance of interest under section 36(1)(iii) of the Act. The Tribunal upheld the FAA's decision to delete the disallowance made by the AO in the first issue, emphasizing the inclusion of investments from merged companies. In the second issue, the Tribunal sent the matter back to the AO for further verification regarding interest-free funds and loans, partially deciding in favor of the AO.