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TMI Blog2025 (5) TMI 1326X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income Tax Act, 1961 ["the Act"] arising from the assessment order dated 26.12.2017 passed u/s 143(3) of the Act pertaining to assessment years 2015- 16 and 2016-17 respectively. 2. Brief facts of the case are that the assessee is a company engaged in the business of generation of electricity through wind energy and is operating as a renewable energy independent power producer. The return of income was e-filed on 29.09.2015 declaring total income of INR 1,21,16,410/-. The assessment was taken up for limited scrutiny and in terms of order dated 26.12.2017, the total income of the assessee was assessed at INR 3,25,561/- by making disallowance of INR 1,89,40,151/-, after invoking the provision of section 36(1)(iii) and further disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted by the assessee that the funds were borrowed for the purpose of business and the investment was made in the group concern which was made out of the interest free funds available with the assessee in the shape of equity capital and reserves. Thereafter, the AO computed the amount of disallowance in terms of the formula provided in Rule 8D(2)(iii) of the Income Tax Rules, 1962 and computed the amount of disallowance under section 36(1)(iii) of INR 1,89,40,151/-. The AO also disallowed half percent of the average value of investment which comes to INR 15 Lakhs under section 37(1) of the Act. 6. Both the disallowances were deleted by the Ld.CIT(A) by placing reliance on the judgement of Hon'ble Supreme Court in the case of S.A. Builde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Hero Cycle (P) Ltd. vs CIT (Central) [2015] 379 ITR 347 (SC). It is also submitted by the assessee that the assessee is having interest free funds at the opening day of previous year totaling to INR 85.13 crores comprising of equity share capital of INR 73.30 crores and reserves of surplus INR 11.38 crores. He further submits that the assessee is having sufficient cash flow thus, the investment of INR 60 crores made during the year in non-convertible, non-participating preference was not made out of the borrowed funds and therefore, no disallowance could be made under s. 36(1)(iii) of the Act. For this, he placed reliance on the following judicial precedents:- 1. Munjal Sales Corporation Ltd. 298 ITR (SC) 2. C.I.T vs Reliance Utili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stant case, it is seen that though the AO has made disallowance under section 36(1)(iii) of interest and under section 37(1) towards the management fee for making such investment however, both the disallowances were computed in terms of Rule 8D of the Income Tax Rules, 1962. The provisions of Rule 8D(2) could only be invoked if the AO is satisfied that the assessee has incurred certain expenses to earn exempt income. It is an accepted position that in the instant case, no exempt income is earned by the assessee company thus, the action of the AO in computing the amount of disallowances u/s 36(1)(iii) of the Act in terms of the formula provided in Rule 8D(2) of the Rules is patently wrong. 11. It is also seen that for making disallowance un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able expense in terms of the provisions of section 36(1)(iii) of the Act and the expense of interest is not incurred for the purpose of business. However, it is interesting to note as to how the AO made the disallowance. The AO made the disallowance u/s 36 & 37 of the Act but computed the value of disallowance using the methodology provided in Rule 8D of the IT Rules. It is worth to note that Rule 8D is associated with section 14A, thus applying the same to compute disallowance u/s 36(1) (iii) & 37 is totally inconceivable, unjustified and bad in law. For the sake of argument, if it is presumed that an addition was attracted, if otherwise sustainable in the eyes of law, the same could be only made with regard to direct expenses (interest ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncials of the company and a number of case laws relied upon by the appellant. In view of that facts of this case and the decisions relied upon by the appellant, I am of the view that the addition made by the AO on account of disallowance of interest amounting to Rs. 1,89,40,151/- is unjustified as the same is allowable business expenditure. 6.2.6 Similarly, as regards disallowance of Rs. 15,00,000/- u/s 37(1), as discussed above, the same has been wrongly worked out by applying formula given in Rule 8D(2)(iii) thus by mixing up Rule 8D and Section 37 of the Act. Disallowance u/s 37(1) of the Act cannot be made on presumption that making and maintaining investment entails certain expenditure. Otherwise also, no disallowance is called for i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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