TMI Blog2014 (8) TMI 1057X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure of ₹ 77,82,750/- made by the AO. In respect of disallowance of administrative expenses to the tune of ₹ 21,27,075/-, the CIT(A) after following the order of the Tribunal for A.Y.2005-06 held that administrative and managerial expenditure of ₹ 7,12,177/- being 2% of total exempt income was attributable to earning of exempt income. Accordingly, disallowance was restricted to ₹ 7,12,177/-. No reason to interfere in the order of CIT(A) for deleting the interest expenditure and restricting the disallowance of other expenses to the tune of ₹ 7,12,177/-.- Decided against revenue Disallowance of interest claimed u/s.36(1)(iii) - Held that:- Advance of ₹ 3.30 crores was made by the assessee to M/s Al Rahba International Trading LLC, Abu Dhabi, which is an entity operating in breeding and processing of poultry based in Abu Dhabi. Under Abu Dhabi law, any entity operating in Abu Dhabi needs to necessarily have a majority shareholding by a resident domiciled in Abu Dhabi. This, however, does not prohibit the profit sharing ratio and funding ratio to be different. However, share of the assessee company in the capital of M/s Al Rahba Internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances of the case as well as in law, the learned CIT(A) erred in holding that no direct or indirect interest expenditure was incurred by the assessee during that year for making investments during the year for earning exempt income and consequently erred in deleting the disallowance of indirect interest expenditure of ₹ 77,82,750/made by the Assessing Officer. 5. On the facts and in the circumstances of the case as well as in law, the learned CIT(A) erred in restricting the disallowance of administrative and managerial expenditure attributable to the earning of exempt income to ₹ 7,12,177/- as against the disallowance computed by the Assessing Officer at ₹ 21,27,075/-. 6. On the facts and in the circumstances of the case as well as in law, the learned CIT(A) erred in directing the A.O. to consider only ₹ 7,12,177/- for the purpose of making adjustment as per clause(f) of the Explanation to section 115JB of the Income Tax ct 1961. 7. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored . 3. Rival contentions have been heard and record perused. Facts in brief ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urable ITAT in A.Y. 2005-06, has given a finding of fact that no direct or indirect interest expenditure was attributable to earning of exempt income. This finding of fact of the Honourable ITAT being binding on the lower authorities, therefore the undersigned has to decide the issue with the presumption that upto 31-03-2006, no direct or indirect expenditure was incurred by the appellant for the purpose of making investment which yielded exempt income. Therefore, the only question for consideration is as to whether the appellant incurred any interest expenditure for the purpose of making investments during the year which had yielded exempt income. For this purpose only the investments made during the year are required to be considered and as to whether the same were made out of borrowed funds and also as to whether those investments yielded exempt income or taxable income. The appellant in its submissions discussed above, has explained that the total investment during the year was only ₹ 18.09 crores. The investment was admittedly made out of borrowed funds. However, the investment of ₹ 18 crores was made only for a very short period of 2 days only. However, this inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06, it is held that administrative and managerial expenditure of ₹ 7,12,177/- being 2% of total exempt income was attributable to the earning of exempt income. In the facts and circumstances, the disallowance made by AO at ₹ 21,27,075/- is reduced to ₹ 7,12,177/-. The balance disallowance is hereby deleted. 6. We have considered rival contentions, carefully gone through the orders of the authorities below and found that by invoking provisions of Section 14A, AO has disallowed interest expenditure of ₹ 77,82,750/- and other expenses amounting to ₹ 21,27,075/-. Whatever the investment was made, was made in earlier assessment year i.e. AY 2005-06. The department has also disallowed assessee s claim for interest by invoking provisions of Section 14A in the AY 2005-06. However, in an appeal filed by the assessee, the Tribunal has deleted the addition after having the following observation vide its order dated 17-9-2010 in ITA No.1629/Mum/2009. The precise observations of the Tribunal are as under :- 7. The A.O. did not find the submission of the assessee to be acceptable. According to him, although the assessee had enough surplus funds to mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 to 7 of the assessee s appeal relating to the disallowance made out of interest expenditure by invoking the provisions of section 14A, it is observed that elaborate submissions were made on behalf of the assessee before the A.O. as well as before the ld. CIT(A) to establish that the investment in shares was made out of its own funds and the borrowed funds of ₹ 31.98 crores were entirely utilized for the purpose of its business. At the time of hearing before us, the ld. Counsel for the assessee has taken us through the copies of such submissions placed in his paper book to demonstrate that the entire amount of borrowed funds was utilized for the purpose of its business by the assessee company and the investment in shares was made by it out of its own funds. As pointed out by him, the said borrowed funds to the extent of ₹ 21.59 crores were availed by the assessee in the earlier year and in the assessment completed for A.Y. 2004-05, the A.O. had accepted after verification of the relevant record that the borrowed funds to that extent were utilized by the assessee company for the purpose of its business and the investment in shares was made by it out of its own funds. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding has been given by the Tribunal to the effect that no direct or indirect interest expenditure was attributable to earning of exempt income. Thereafter the CIT(A) examined the investment if any made during the year and whether the same was out of borrowed funds and has to exempt income or taxable income earned by the assessee on those investments. It was found that total investment during the year was ₹ 18.09 crores. It was further found that investment of ₹ 18 crores was out of borrowed funds but was only for a short period of two days. Whatever income was yielded through these investments, was offered as taxable income by the assessee in its return of income. It was also found by the CIT(A) that balance investment of ₹ 9,500/- was made in a company incorporated in Abu Dhabi, dividend income was also taxable. Accordingly, though disallowance was warranted u/s.14A, the CIT(A) also examined investment made after 31-3-2006, which had yielded only taxable income and recorded a finding to the effect that no direct or indirect expenditure was incurred by the assessee during the year for earning exempt income. Accordingly, he deleted the disallowance of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany is 45% only. Therefore, the appellant's share of profit and loss in the said company should have been only 45%. However, the appellant's share of profit/loss in the said company is 70%. The appellant has explained that as per laws/Rules of Abu Dhabi, Nonresident cannot have share capital of more than 45%. However, this restriction is not applicable in case of profit/loss sharing ratio. The appellant has explained that for getting more share of profit/loss i.e. 70%, it had invested / given an amount of ₹ 3.30 crore to that company as interest free loan/advance. Thus, the appellant has satisfactorily explained that the interest free loan of ₹ 3.30 crore has been given to the said company for the purpose of business only i.e. for getting more share of profit in that company. In the facts and circumstances, the decision of Supreme Court in the case of S.A. Builders (supra) is applicable in appellant's case that the appellant has given interest free loan of ₹ 3.30 crore to the said company considering the commercial expediency. In other words, the appellant has given interest free loans to the said company wholly and exclusively for the purposes of b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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