2021 (5) TMI 519 - AT - Income Tax

Appeal allowed for AY 2014-15, Assessing Officer to reassess disallowances under Section 14A, Rule 8D, Section 36(1)(iii)

Nahar Spinning Mills Ltd. Versus Asstt. Commissioner Income Tax, Circle-7, Ludhiana.

Nahar Spinning Mills Ltd. Versus Asstt. Commissioner Income Tax, Circle-7, Ludhiana. - TMI Issues Involved:1. Disallowance under Section 14A read with Rule 8D.2. Disallowance of interest under Section 36(1)(iii).Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D:The assessee, engaged in manufacturing and trading of cotton/blended yarn, cloth, and garments, filed its return of income declaring a total income of Rs. 137,51,95,480/-. The Assessing Officer (AO) made an addition of Rs. 22,44,117/- on account of disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962. The Commissioner of Income Tax (Appeals) [CIT(A)] restricted this addition to the amount claimed as exempt under Section 10(34) of the Income Tax Act, 1961.The assessee appealed, arguing that the disallowance should be computed on a proportionate basis, as held in its own case for the Assessment Year (AY) 2010-11 by the ITAT Chandigarh Bench in Oswal Woolen Mills Vs ACIT. The Tribunal had directed the AO to restrict the disallowance to the working given by the assessee on a proportionate basis. The assessee also contended that the disallowance should be computed by taking the average investment on which dividend income accrued, excluding interest paid on term loans, working capital loans, and other borrowing costs directly attributable to business receipts subjected to tax.The Departmental Representative (DR) supported the CIT(A)'s order but admitted that the jurisdictional Tribunal had set aside a similar order in Oswal Woolen Mills Ltd. Vs. ACIT, directing the AO to restrict the disallowance to the amount computed by the assessee on a proportionate basis.The Tribunal, after reviewing the material on record and the cases cited, noted that the AO had not recorded any dissatisfaction with the assessee's claim. Following the decision in Oswal Woolen Mills Ltd. Vs. ACIT, the Tribunal sent the issue back to the AO to determine the disallowance on a proportionate basis or restrict it to the amount computed by the assessee if found in accordance with the Tribunal's order.2. Disallowance of interest under Section 36(1)(iii):The AO disallowed Rs. 57,26,985/- being interest on a cash credit (CC) account used for the purchase of fixed assets, claiming the assessee had sufficient own funds in the form of capital and reserves. The CIT(A) confirmed this addition.The assessee argued that it had sufficient funds in the shape of capital, reserves, and internal accruals, relying on judgments from the Supreme Court and High Courts, including CIT vs. Reliance Ind. Ltd., Godrej & Boyce Manufacturing Co. Ltd vs. DCIT, and Bright Enterprise (P) Ltd. vs. CIT. The assessee's contention was that the authorities had not rebutted its claim of sufficient funds for acquiring the assets in question.The Tribunal referred to the coordinate Bench's decision in Monte Carlo Fashions vs. AICT, which held that no disallowance of interest is warranted if the assessee has sufficient own funds. The Tribunal set aside the CIT(A)'s findings and sent the issue back to the AO to verify the fund position and determine whether borrowed funds were utilized more than available own funds, in line with the decisions rendered above.Conclusion:The appeal filed by the assessee for the AY 2014-15 was allowed for statistical purposes, with directions to the AO to re-evaluate the disallowances under Section 14A read with Rule 8D and Section 36(1)(iii) based on the proportionate basis and fund position, respectively, after giving a reasonable opportunity of being heard to the assessee.