2022 (11) TMI 229 - AT - Income Tax

Tribunal Reverses CIT(A)'s Income Enhancement for Interest Expenses; Upholds AO's Addition of Interest on Tax Refund.

Geetanjali Hotels & Promoters Pvt. Ltd. Versus ACIT/DCIT, Circle-2, Jaipur

The Tribunal allowed the assessee's appeal concerning the disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act, reversing the ... Disallowance u/s 14A r.w.r. 8D - During the course of assessment, the AO was of the view that the income received by the assessee from investments made in AOP is exempted and consequently he applied the Section 14A r.w.rule 8D made disallowance - HELD THAT:- As noted from the record that the assessee was having total interest funds to the tune of Rs.15.13 crores whereas total loan given to subsidiaries were to the tune of Rs.12.92 crores (PB 41) only and if the amount of interest charged is further reduced from this amount then it comes to Rs.6.35 Crores (Rs.12.92 Cr. Minus Rs.6.57 Cr.) which is more than the disallowance confirmed by the ld. CIT(A) amounting to Rs.1,74,18,626/-. The decisions relied upon by the ld. AR of the assessee finds favour in this case. Since, the assessee has not challenged the finding of the ld. AO. The addition made by the ld. AO is confirmed and that of the ld. CIT(A) is reversed. In this view of the matter, we feel that the ld. CIT(A) has exceeded his jurisdiction and the enhancement made by the ld. CIT(A) deserves to be deleted . Thus Ground No. 1 of the assessee is allowed. Interest on income tax refund - HELD THAT:- AO noted that the assessee had received income tax refund amounting to Rs.4,29,218/- but the assessee in the income tax return had shown interest amount of Rs.1,17,100/- only. During the course of assessment proceedings, the assessee could not dispel the doubt raised by AO about the interest amount of Rs.1,17,100/- . Hence, the AO made of Rs.3,12,118/- to the total income of the assessee. In first appeal, the ld. CIT(A) confirmed the action of the AO. During the course of hearing, the ld. AR of the assessee has not advanced any submissions or arguments controverting the findings of the ld. CIT(A) as to the addition sustained by the ld. CIT(A) amounting to Rs.3,12,118/-. In this view of the matter, the ground No. 2 of the assessee is dismissed. Issues Involved:1. Disallowance of interest expenses under Section 36(1)(iii) of the Income Tax Act.2. Addition of interest on income tax refund.Detailed Analysis:Issue 1: Disallowance of Interest Expenses under Section 36(1)(iii) of the Income Tax ActBackground:The assessee, engaged in the business of owning, running, and managing hotels, filed returns for the assessment year 2013-14 declaring a total income of Rs. 52,03,990/-. The Assessing Officer (AO) selected the case for scrutiny and completed the assessment, determining a total income of Rs. 90,39,480/- after making disallowances under Section 14A and towards unpaid employees' contributions to ESI and PF.Appeal and Enhancement by CIT(A):The assessee appealed against the AO's order. The Commissioner of Income Tax (Appeals) [CIT(A)] disagreed with the AO's disallowance under Section 14A but enhanced the income by Rs. 1,69,70,854/- under Section 36(1)(iii), stating that the advances made to subsidiaries were for non-business purposes and out of interest-bearing loans.Assessee's Arguments:1. Business Purpose of Investments:- Investments in subsidiaries and AOP were made for business expansion and were commercially expedient.- The assessee had sufficient interest-free funds to cover these investments.2. Sufficient Interest-Free Funds:- The assessee had substantial interest-free funds, including reserves, surplus, and accumulated depreciation, which were more than the loans given to subsidiaries.3. No Nexus Established:- The AO failed to establish a nexus between the interest-bearing funds and the interest-free loans given.4. Case Laws Supporting Assessee's Claim:- Various judgments, including CIT vs. Tulip Star Hotels Ltd. and CIT vs. Reliance Communications Infrastructure Ltd., supported the claim that interest on borrowed funds used for business purposes should be deductible.Tribunal's Findings:1. Investments and Loans for Business Purposes:- The investments in subsidiaries and AOP were for business purposes and commercially expedient.- The assessee had sufficient interest-free funds to cover these investments.2. CIT(A) Exceeded Jurisdiction:- The CIT(A) exceeded his jurisdiction by enhancing the income under Section 36(1)(iii) when the original disallowance was under Section 14A.- Enhancement by CIT(A) was without jurisdiction as he cannot find new sources of income not considered by the AO.Conclusion:The Tribunal allowed the assessee's appeal, reversing the enhancement made by the CIT(A) under Section 36(1)(iii).Issue 2: Addition of Interest on Income Tax RefundBackground:The AO noted that the assessee had received an income tax refund amounting to Rs. 4,29,218/- but had only shown interest of Rs. 1,17,100/- in the return. Consequently, the AO added Rs. 3,12,118/- to the total income.Assessee's Arguments:The assessee argued that they had no intimation or update in the 26AS statement regarding the interest on the income tax refund.CIT(A)'s Findings:The CIT(A) confirmed the AO's addition, stating that the income has to be determined correctly as per the provisions of the Act, regardless of whether the assessee was aware of the interest income.Tribunal's Findings:The Tribunal upheld the addition made by the AO and confirmed by the CIT(A), as the assessee did not provide any substantial arguments or evidence to counter the findings.Conclusion:The Tribunal dismissed the assessee's ground regarding the addition of interest on the income tax refund.Final Order:- The appeal in ITA No. 298/JP/2017 (Assessment Year 2012-13) is allowed.- The appeal in ITA No. 299/JP/2017 (Assessment Year 2013-14) is partly allowed.