Wanbury Limited Vs DCIT (ITAT Mumbai)
ITAT find that during the year, the assessee has not earned any exempt income and further assessee denied that it has incurred any expenditure. Now therefore it is mandatory on part of the learned assessing officer to record a satisfaction that the claim of the assessee is not correct. Such is the mandate of the provisions of Section 14 A (2) of the act. We find that the learned assessing officer has merely on the basis of the investment shown in the annual accounts of the assessee has invoked the provisions of Section 14 a read with rule 8D and issued notice to the assessee. When assessee has categorically replied that it has not incurred any expenditure during the year the learned assessing officer is duty-bound to record a satisfaction that why the explanation furnished by the assessee is incorrect. Such satisfaction also has to be based on accounts of the assessee. If assessing officer merely says that as the investment decision are very complex the assessee should have incurred certain expenditure cannot satisfy the requirement of Section 14 A (2) of the act. This shows that there is no reference to the accounts of the assessee. Accordingly, we find that assessing officer has failed to record any satisfaction prior to invoking of the provisions of rule 8D of income tax rules 1962. Accordingly ground number 2 of the appeal of the assessee is allowed and disallowance made by the learned assessing officer u/s 14 A of the act of ₹ 192,395/– confirmed by the learned CIT – A deserves to be deleted in view of absence of proper satisfaction recorded by the learned AO.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
01. This appeal is filed by the assessee against the order passed by learned Commissioner of Income Tax (Appeals)-24, [the learned CIT (A)], Mumbai dated 07.02.2019 for AY 2015-16 raising following grounds of appeal.
“1. Disallowance under Section 36(1)(iii) of the Act.
1.1. On the facts and circumstances of the case, the Ld. CIT(A) has erred in disallowing interest expense under section 36(1)(iii) of the Act amounting to Rs. 2,39,97,017 without appreciating the fact that the Appellant has incurred interest expense for the purpose of business and accordingly, the same ought to be allowed as deduction while computing income from business and profession.
1.2. Without prejudice to Ground No. 1.1 above and on the facts and circumstances of the case, the Ld. CIT(A) has erred in disallowing interest expense under section 36(1)(iii) of the Act without appreciating the fact that the Appellant had given advances to four unrelated parties (outstanding as on April 1, 2014) out of own funds and internal accruals of previous years and accordingly, disallowance ought to be restricted to the amount advanced during the year under consideration.
1.3. Without prejudice to Ground No. 1.1 & 1.2 above and on the facts and circumstances of the case, the Ld. CIT(A) has disregarded the fact that the Appellant has given advances to three parties and charged interest at a rate of 6.11% and accordingly no disallowance under section 36(1)(iii) is warranted on advances given to these three parties.
1.4. Without prejudice to Ground No. 1.1, 1.2 & 1.3 above and on the facts and circumstances of the case, the Ld. CIT(A) has disregarded the fact that the Appellant has given advances to three parties and charged interest at a rate of 6.11% and thereby erred in not restricting the disallowance on amounts advanced during the year to the fourth party by adopting such rate of 6.11%.
1.5. Without prejudice to Ground No. 1.1, 1.2, 1.3 & 1.4 above and on the facts and circumstances of the case, the Ld. CIT(A) has erred in computing the disallowance under section 36(1)(iii) by adopting an ad-hoc rate of 12% (assuming prevailing market rate), instead of restricting the quantum of disallowance to average rate of interest on borrowings availed by the Appellant.
1.6. Without prejudice to Ground No. 1.1, 1.2, 1.3, 1.4 & 1.5 above and on the facts and circumstances of the case, the Ld. CIT(A) has erred in not restricting the disallowance of interest under section 36(1)(iii) of the Act on a proportionate basis i.e. in proportion of average loan advanced to four unrelated parties to the average value of total assets for AY 2015-16.
2. Disallowance under Section 14A of the Act
2.1 On the facts and circumstances of the case, the Ld. CIT(A) has erred in upholding disallowance of Rs. 1,92,395 under section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962, without appreciating the fact that no exempt income has been earned by Appellant during the year under consideration.”
02. The brief fact of the case shows that assessee is a company engaged in manufacturing of bulk drugs and trading of pharmaceutical products. It filed its return of income on 29.09.2015 at a loss of Rs. 137,37,370/-. The case of the assessee was picked up for scrutiny.
03. Assessment order u/s 143 (3) of the income tax act 1961 was passed on 15 December 2017 wherein the returned income of the assessee was assessed at ₹ 79,877,752/– against loss of Rs 1,37,37,370/- . Learned AO has made following three additions:-
i. disallowance u/s 36 (1) (iii) of ₹ 7,774,946/–
ii. disallowance u/s 14 A of the act ₹ 72,877,022/–
iii. disallowance u/s 36 (1) (va) of the act Rs 129,63,154/-
04. Subsequently order u/s 154 of the income tax act was passed on 5/2/2017 wherein the disallowance u/s 14 A was revised to Rs 1,92,395/-
05. on appeal before learned CIT A, disallowance u/s 36 (1) (iii) of the act was enhanced by ₹ 16,222,071/– over and above the disallowance made by the learned assessing officer of ₹ 7,774,946/– thereby confirming the disallowance of ₹ 23,997,017/–. Disallowance u/s 14 A of the act was also confirmed by ₹ 192395/- . Therefore, assessee is in appeal.
06. Ground number 1 is against disallowance u/s 36 (1) (iii) of ₹ 23,997,017/–.
07. During the course of assessment proceedings the learned Assessing Officer noted that assessee has debited financial expenditure of Rs. 17,31,34,000/-. The learned Assessing Officer noted that assessee has given a loan to one company M/s Beyond Pharma Ltd. of Rs. 6, 47, 91,216/- without charging any interest. In absence of any information forthcoming from the assessee, the learned Assessing Officer held that as assessee has paid interest on loan fund and has given interest free loan therefore, he computed the interest disallowance of Rs. 77,74,946/- @ 12% and disallowed the same under provisions of section 36(i)(iii) of the income tax Act, 1961 (the Act). This addition was challenged before the learned CIT – A. He found that assessee has also advanced loans to various other parties without charging interest or charging interest at lower rate. Therefore he issued notice for enhancement u/s 251 (2) of the act on 31st of December 2018. He tabulated the information as Under:-
