Living Media India ltd Vs ACIT (ITAT Delhi)
ITAT Delhi held that disallowance u/s 37(1) of the Income Tax Act towards investment made out of interest free own funds available with the assessee is unjustifiable and hence deleted.
Facts- The issue involved here is that AO has made a disallowance of Rs. 78,20,000/- u/s. 37(1) of the Act observing that during the year under consideration the assessee company has incurred interest expenses @ 3.4% on the funds borrowed whereas the loans and advances to related parties are interest free. It concluded the proportionate finance cost attributable to the interest free advance given by the assessee company to its related concern comes to Rs. 78,20,000/- being 3.4% of Rs. 23 crores. AO had observed that assessee had diverted interest bearing funds to not interest bearing activities.
Ld. First Appellate Authority sustained the disallowance. Being aggrieved, the present appeal is filed.
Conclusion- Held that the assessee had sufficient surplus funds and had raised capital during the year by issuance of shares. Thus, merely because the assessee had also raised loans or paid interest against loans that does not justify the disallowance. The investment in subsidiary and related entities has to be made for commercial purpose to earn future profits. It is not the case of revenue that investment were made in any entity not having any nexus with the principal object of assessee company. Hon’ble Supreme Court of India in South Indian Bank Ltd. vs. Commercial of Income Tax has held that if interest free own funds are available with the assessee or exceeds investment, investment would be presumed to be made out of assessee’s own fund. Thus, the Bench is convinced that the disallowance was not justified the same deserves to be deleted.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeal has been filed by the Assessee against order dated 11.09.2018 in appeal no. 86/17-18 in assessment year 2013-14 passed by Commissioner of Income Tax (Appeals)-36, New Delhi (hereinafter referred to as the First Appellate Authority in short ‘Ld. F.A.A.’) in regard to the appeal before it arising out of assessment order dated 23/03/2016 u/s 143(3) of the Income Tax Act, 1961 passed by ACIT, Circle 15(2), Delhi (hereinafter referred to as the Assessing Officer ‘AO’).
2. The assessee is engaged in the business of Subscription, Publishing and trading of books, magazines and diaries, sale of advertisement space in magazines, trading of audio Cassettes, CDs and Art objects etc. Revised return declaring loss of Rs. 23,49,28,640/- was filed which was selected for scrutiny and notice u/s 143(2) were issued. As per the assessment order, during the course of assessment proceedings it was noticed that the assessee has investments in equity shares, income from which does not form part of total income to the extent of 1,39,00,73,250/-. Ld. AO considering provisions of Section 14A and Rule 8D of the Income Tax Rules and following Circular No. 5/2014 dated 11.02.2014 of CBDT disallowed an amount of Rs. 6,37,90,540/- with following computation :-
