2018 (6) TMI 1270 - AT - Income Tax

Appellate Tribunal Overturns Disallowances on Interest and Fees, Cites Lack of Evidence

The Appellate Tribunal allowed both appeals filed by the assessee, overturning the disallowances imposed by lower authorities on interest expenses and ... Addition of interest expenses under the provision of Section 14A r.w.r. 8D.- sufficiency of own funds - Held that:- As the owned funds of the assessee exceed the amount of investment. In such facts and circumstances, a presumption can be drawn that the investment has been made out of the owned funds of the assessee. See THE COMMISSIONER OF INCOME TAX VERSUS RELIANCE UTILITIES & POWER LTD. [2009 (1) TMI 4 - BOMBAY HIGH COURT] -no disallowance of interest expense claimed by the assessee can be made under the provision of Section14A of the Act r.w.r. 8D of IT Rules - Decided in favour of assessee Addition on account of professional fees - services availed from Chartered Accountant about its investments activities - AO was of the view that such expenses are unreasonable as per the market rate - Held that:- The genuineness of the expenses has not been doubted. The payment was made through banking channel. However, as per the lower authorities, the expenses claimed by the assessee were unreasonable and exceeding market rate. However, before us, none of the lower authority has brought on record to justify the prevailing market rate for such consultancy fees. Thus, it appears that the disallowance has been made on the estimated basis on the surmises and conjuncture of the AO. In these circumstances, we are of the view that the estimated disallowance is not sustainable in the eyes of the law. See ANIMESH SADHU, C/O. SHRI SOMNATH GHOSH, ADVOCATE, VERSUS ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1, AAYAKAR BHAWAN, DIST. HOOGHLY [2014 (11) TMI 1170 - ITAT KOLKATA] - we delete the addition made by the lower authorities - Decided in favour of assessee. Issues Involved:1. Disallowance of interest on borrowings under Section 14A r.w.r. 8D.2. Disallowance of professional fees.Issue-wise Detailed Analysis:1. Disallowance of Interest on Borrowings under Section 14A r.w.r. 8D:The first issue raised by the assessee pertains to the disallowance of interest expenses amounting to Rs. 46,481/- under the provisions of Section 14A read with Rule 8D. The assessee, a Hindu Undivided Family (HUF), had shown investments in mutual funds, equity shares, and PPF totaling Rs. 52,20,853/- in its balance sheet and claimed interest expenses in its income tax return. The Assessing Officer (AO) observed that the borrowed funds were invested in securities generating exempt income, necessitating a disallowance under Section 14A. Despite the assessee's contention that its own funds exceeded the investments, the AO disregarded this, citing a failure to prove the source of funds used for the investments. Consequently, the AO added Rs. 46,481/- to the total income of the assessee.Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the assessee could not justify that the investments were made from interest-free funds. The CIT(A) referenced the Gujarat High Court's decision in UTI Bank Ltd., which was distinguishable due to different facts.However, the Appellate Tribunal found that the owned funds of the assessee indeed exceeded the investment amount, as evidenced by the balance sheet. The Tribunal drew from the Bombay High Court's judgment in Reliance Utilities and Power Ltd., which presumes investments are made from interest-free funds if such funds are sufficient. The Tribunal also referenced the Gujarat High Court's decision in UTI Bank Ltd., supporting the presumption that investments were made from interest-free funds. Thus, the Tribunal reversed the lower authorities' orders and directed the AO to delete the addition, allowing the assessee's appeal on this ground.2. Disallowance of Professional Fees:The second issue involved the disallowance of Rs. 3,20,000/- out of a total Rs. 5,60,000/- claimed as professional fees. The assessee had shown gross interest income of Rs. 63,79,238/- and claimed the professional fees for services related to investment activities. These services were confirmed by the service provider, a Chartered Accountant (CA). The AO, however, found the fees disproportionate to the market rate and doubted the CA's capability as an investment consultant, leading to the disallowance of Rs. 3,20,000/-.The CIT(A) upheld the AO's decision, arguing that the professional fees paid were not justified and lacked a direct nexus with the interest income. The CIT(A) relied on various judicial precedents emphasizing the importance of substance over form and the necessity of a direct link between expenditure and income.In the second appeal, the assessee argued that the disallowance was based on personal opinion and not on concrete evidence. The assessee highlighted the CA's professional versatility and the legitimate need for the services rendered. The Tribunal found that the genuineness of the expenses was not in doubt, and the payment was made through banking channels. The disallowance was deemed to be made on an estimated basis without substantiating the prevailing market rate for such services. The Tribunal referenced a similar case (Animesh Sadhu Vs. ACIT) where estimated disallowances were found unsustainable. Consequently, the Tribunal deleted the addition and allowed the assessee's appeal on this ground.Separate Judgments Delivered:The Tribunal issued a consolidated order for both appeals (ITA 2845/Ahd/2016 and ITA 2846/Ahd/2016) since the issues were identical across the assessment years, differing only in the amounts involved. The Tribunal's decision in ITA 2845/Ahd/2016 was applied to ITA 2846/Ahd/2016, resulting in both appeals being allowed.Conclusion:In conclusion, the Tribunal allowed both appeals filed by the assessee, reversing the disallowances made by the lower authorities on both interest expenses and professional fees. The Tribunal emphasized the sufficiency of owned funds for investments and the unsubstantiated nature of the professional fees disallowance.