2018 (10) TMI 1957 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - nexus between interest expenditure and exempt income earned i.e. share of profit from partnership firms and the investments in partnership firms are made out of own capital - case of the assessee was that no disallowance was to be made on account of interest expenditure as the amount was invested in partnership firms not for earning share of profits which in any case was earned irrespective of the investment made - HELD THAT - Rule of Consistency is not applicable to the Income Tax Proceedings but consistent approach should be adopted if facts remain same. In any case factual aspects of the other years are not available except that no such disallowances u/s.14A had been made in the other years. However in the year under consideration AO applied provisions of section 14A and disallowed the total interest charged on the debit balance of the capital accounts. In this regard another aspect is the total interest free funds available as per Balance Sheet were 11.62 Crore and tax free investments and plea of the assessee was that no disallowance is called for in view of the ratio laid down in the case of HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT Applying the said principle no disallowance is to be made under section 14A - Accordingly ground of appeal No.1 raised by the assessee is allowed. Disallowance u/s 57(iii) - AO observed two things i.e. rate of interest on which loan was taken was higher i.e. @ 22.8% and on advance; interest was charged by assessee @18% - in more cases 10 out of 17 cases of borrowed loan assessee had paid interest - HELD THAT - Assessee had charged interest on advances in 4 cases out of 18 cases. The Assessing Officer disallowed excess claim of Rs.2, 00, 000/- out of total interest of Rs.38, 56, 312/- claimed u/s.57(iii) of the Act. It was clarified by Ld. AR for the assessee that the interest paid by assessee was to the tune of Rs. Rs.45, 30, 821/- which was restricted to Rs.38, 56, 312/-; hence there is no merit in the so-called disallowance of Rs.2, 00, 000/-. Since the actual claim of the assessee has been restricted no other disallowance is thus warranted. Accordingly addition of Rs.2, 00, 000/- is thus deleted. Thus ground of appeal No. 2 raised is allowed.

Summary

Issues:
1. Disallowance made under section 14A of the Act.
2. Disallowance under section 57(iii) of the Act.

Issue 1: Disallowance made under section 14A of the Act:
The appeal challenges the disallowance of interest expenditure under section 14A of the Income Tax Act, 1961. The Assessing Officer disallowed interest expenditure of Rs.32,05,320, contending that the amount was invested in partnership firms whose income was exempt from tax. The assessee argued that no disallowance should be made as the investment was not for earning exempt income. The Assessing Officer also computed interest-free funds available and noted that the investment in firms exceeded the interest-free funds. The CIT(A) upheld the disallowance, leading to the appeal before the Tribunal. The Tribunal allowed the appeal, emphasizing that no disallowance was warranted as the investment was not directly related to earning exempt income, citing the case of HDFC Bank Ltd. Vs. DCIT, 366 ITR 505(Bom.).

Issue 2: Disallowance under section 57(iii) of the Act:
The second issue pertains to the disallowance of Rs.2,00,000 under section 57(iii) of the Act. The Assessing Officer disallowed this amount due to discrepancies in the interest rates on loans taken and advances given by the assessee. The assessee argued that the actual interest paid was higher than the claimed amount, thus no further disallowance was warranted. The Tribunal agreed with the assessee, stating that since the actual claim was restricted, the disallowance of Rs.2,00,000 was deleted. Consequently, the appeal was allowed in favor of the assessee.

In summary, the judgment addressed two main issues: disallowance under section 14A of the Act and disallowance under section 57(iii) of the Act. The Tribunal ruled in favor of the assessee on both issues, allowing the appeal and overturning the disallowances made by the Assessing Officer and upheld by the CIT(A).