TMI Blog2020 (1) TMI 1049X X X X Extracts X X X X X X X X Extracts X X X X ..... s further purpose of business and genuine. Once, the genuineness is proved and interest is paid on the borrowings, no interest can be disallowed on the grounds that the assessee has not correctly used the amounts borrowed. Also in the case of SA Builders [ 2006 (12) TMI 82 - SUPREME COURT] held that in case of interest bearing loans taken and interest free advances given, what is to be looked into is the measure of commercial expediency and for the purpose of the business . Hence, keeping in view the facts of the case and legal prepositions laid down on this aspect of allowability of interest u/s 36(1)(iii), we hereby decline to interfere with the order of the ld. CIT (A). The appeal of the revenue on this ground is dismissed. Disallowance u/s 14A - suo-moto disallowance by assessee - CIT (A) deleted the addition owing to non-adherence in accordance with the provisions of Section 14A(2) - DR argued that to invoke Rule 8D(2), no satisfaction is required as it is an automatic provision for determining the disallowance - HELD THAT:- While a lot of emphasis is placed by the counsel on wordings of section 14A(2) which refer to the need of Assessing Officer's satisfaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO on account of interest paid u/s 36(1)(iii) of the I.T. Act, 1961 without appreciating the facts of the case that the interest bearing funds to group company without charging interest and the department has also filed appeal before the Hon ble ITAT in A.Y. 2011-12 on the similar issue. 2. The ld. CIT (A) has erred in deleting the additions made by the AO u/s 14A of ₹ 37,40,940/- on the ground that provision of Sec. 14A(2) read with Rule 8D cannot be invoked unless the A.O. is dissatisfied about the correctness of the disallowance made by the assessee himself which is correctness of the suomoto disallowance. The A.O. demonstrated her dissatisfaction about the correctness of the suo-moto disallowance in her assessment order when she has elaborately discussed why additions of ₹ 37,40,940/- is being made u/s 14A of the I.T. Act. 3. Brief facts of the case are that the assessee has obtained loans of ₹ 17.15 crores on which interest of ₹ 1.44 crores has been paid. The assessee has used this amount towards extending interest free loans advances, investments and capital work. The share capital and the reserves surplus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 465 (Guj.) CIT Vs Sujani Textiles P. Ltd. 151 ITR 653 (Mad.) India Metals Ferro Alloys Ltd. Vs CIT 193 ITR 344 CIT Vs Abishek Industries Ltd. 286 ITR 1 (P H) 7. The ld. CIT (A) deleted the addition on the grounds that the amounts extended as loan are neither colorable nor illusionary transactions and since the monies have been rightly used for the purpose of the business no disallowance is warranted. 8. Before us during the arguments, the ld. DR vehemently argued that once the amounts are interest bearing, any type of interest free loans given should be treated as given for non-business purpose. It was argued that the allowance is only if the borrowed funds are fully and wholly utilized for the purposes of the business. In this case, the interest free loans given do not form a part of the business activities of the assessee and no commercial expediency has been proved. 9. Rebutting arguments of the revenue, the ld. AR argued that the judgment of Abishek Industries Ltd. (supra) is not more good law and the case of Sujani Textiles P. Ltd. (supra) is distinguishable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10,707.46 Reserves Surplus 29,088.75 Total interest free funds available 39,796.21 Investments: Shares Partnership firm on which exempted income is generated 603.89 Total Investments 39,192.32 13. From the above, it is clear that the investments made by the assessee are far less than the own funds available with the assessee. Further, it is found from the record that the assessee has disallowed ₹ 6,76,757/- on account of disallowance u/s 14A. Before us it was argued by the ld. AR that the Assessing Officer has not mentioned anything about dissatisfaction regarding the disallowance made by the assessee in accordance with the provisions of Section 14A(2) and the ld. CIT (A) deleted the addition owing to non-adherence in accordance with the provisions of Section 14A(2). The ld. DR on the other hand, supporte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. Rule 8D 30. As we have already noticed, sub-section (2) of Section 14A of the said Act refers to the method of determination of the amount of expenditure in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of interest [other than the amount of interest included in clause (i)] incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure - one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under Section 14A of the said Act. It is, therefore, clear that in terms of the said Rule, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases where the in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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