PATEL CORPORATION LLP.,MUMBAI vs. ITO 31(2)(5), MUMBAI

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ITA 3417/MUM/2018Status: DisposedITAT Mumbai20 April 2020AY 2014-155 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal upheld the CIT(A)'s decision to restrict the disallowance under section 14A to the amount of exempt income. The Tribunal also followed a co-ordinate bench decision to delete the disallowance of interest expenses.

What were the facts?

The assessee received exempt income of Rs. 767. The AO disallowed Rs. 1,98,98,387 under section 14A. The assessee also incurred interest expenses on borrowed funds which were advanced to a sister concern at a lower rate, leading to a disallowance of Rs. 44,10,000.

What were the issues?

Whether disallowance under Section 14A should be restricted to exempt income. Whether interest paid on borrowed funds advanced to a sister concern at a lower rate is disallowable under Section 36(1)(iii).

Which sections of the Income-tax Act were involved?

Section 14A,Section 36(1)(iii)

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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI

Before: SHRI RAJESH KUMAR & SHRI RAM LAL NEGI

For Appellant: Shri Mayur Kisnadwala, A.R
For Respondent: Shri Rajesh Kumar Mishra, D.R
Hearing: 04.03.2020Pronounced: 20.04.2020

Per Rajesh Kumar, Accountant Member:

1.

The above titled cross appeals have been preferred against the order dated 16.03.2018 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2014-15.

2 & ITA No.4045/M/2018 M/s. Patel Corporation LLP ITA No.4045/M/2018 (Revenue’s appeal) 2. The only issue raised by the Revenue in various grounds is against the order of Ld. CIT(A) restricting the disallowance under section 14A of the Act to the extent of income earned by the assessee by way of exempt income.

3.

The facts in brief are that during the year the assessee has received exempt income in the form of dividend of Rs.767/-. According to the AO the assessee has not allocated any expenses towards earning of exempt income and he accordingly invoked the provisions of section 14A rule 8D2(ii) & (iii) and calculated the disallowance at Rs.1,98,98,387/- and added the same to the income of the assessee.

4.

In the appellate proceedings, the Ld. CIT(A) restricted the disallowance to the amount of exempt income received by the assessee during the year by following the decision of Hon’ble Delhi High Court in the case of Joint Investment Pvt. Ltd. vs. CIT (2015) 372 ITR 694, CIT vs. Holcim India Pvt. Ltd. (2015) 90 CCH (0081) Delhi – HC and also the decision of P&H HC in the case of CIT vs. State Bank of India, Patiala 393 ITR 476 P&H and also the Hon’ble Supreme Court’s decision in the case of Maxopp Investment Ltd. vs. CIT in Civil Appeal No. 104-109 of 2015 dated 12/02/2018.

5.

After hearing both the parties and perusing the material on record, we observe that Ld. CIT(A) has correctly passed the order restricting the amount of disallowance under section 14A to the amount of exempt income by following the Apex Court decision in the case of Maxopp Investment Ltd. vs. CIT (supra) and 3 & ITA No.4045/M/2018 M/s. Patel Corporation LLP various other decisions. Accordingly, we are inclined to uphold the order of Ld. CIT(A) by dismissing the appeal of the Revenue.

(Assessee’s appeal) 6. The issue raised in ground No.1 is against the confirmation of disallowance of Rs.44,10,000/- by Ld. CIT(A) as made by the AO in respect of interest expenses under section 36(1)(iii) of the Act.

7.

The facts in brief are that during the course of assessment proceedings the AO observed that assessee has borrowed money from Kotak Mahindra Bank @ 15.25% p.a. whereas after taking loan from a sister concern Praham India LLP invested the same in another sister concern Patel Reality @ 10.84% per annum which was later converted into preferential shares to the tune of Rs.10 crores. According to the AO the assessee has paid more interest to the bank as compared to the interest recovered from Patel Reality and the differential rate comes to 4.41% and which is not allowable under section 36(1)(iii) of the Act and accordingly calculated the disallowance at Rs.44,10,000/-.

8.

At the outset, the Ld. Counsel of the assessee pointed out that the assessee is squarely covered by the decision of the co- ordinate bench of the Tribunal in assessee’s sister concern case involving the identical facts in Praham India LLP vs ITO in A.Y. 2014-15 & Others and therefore following the same the ground No.1 may kindly be allowed.

8. The Ld. D.R., on the other hand, relied on the other of Ld. CIT(A).

4 & ITA No.4045/M/2018 M/s. Patel Corporation LLP 9. We have heard the rival submissions of both the parties and perused the material on record and also the decision of the co-ordinate bench of the Tribunal in the case of Praham India LLP (supra) wherein identical issue has been decided by the co- ordinate bench of the Tribunal in favour of the assessee. The operative part is as under: “8. We have considered rival submissions and perused the material on record. As could be seen from the factual matrix of the case, the assessee had availed loan of ` 37.50 lakh from Kotak Mahindra Prime Ltd. at the interest rate of 15.25% per annum. Whereas, it has advanced loan to its subsidiaries Patel Engineering Ltd. and Patel Realty Ltd. @ 12% per annum. The Assessing Officer has disallowed a part of interest under section 36(1)(iii) of the Act due to the difference in rate of interest between the borrowals made by the assessee from bank and interest charged on loans advanced to subsidiary. It is not disputed that Patel Engineering Ltd. and Patel Realty Ltd. are wholly owned subsidiaries of the assessee. Therefore, the assessee has a stake in the performance and profit making of these companies. That being the case, it cannot be denied that the advancement of loan to the aforesaid subsidiaries is in connection with assessee’s business. Moreover, it is not a case where the assessee has advanced loans to subsidiaries without charging any interest. In fact, the assessee has charged interest @ 12% on the loans advanced to the subsidiaries. Therefore, the difference in the interest rate between the borrowed funds and loans advanced is only 3.25%. In any case of the matter, since the assessee had advanced the loan in connection with its business, no disallowance under section 36(1)(iii) could be made as per the ratio laid down in the decisions cited by the learned Authorised Representative. Ground raised is allowed.”

10. We note that the co-ordinate bench of the Tribunal has held that assessee has advanced money to the subsidiary keeping in view the business interest of the assessee and therefore no disallowance under section 36(1)(iii) could be made. Since the facts in the present case are identical to one as decided by the co-ordinate bench of the Tribunal, we, therefore respectfully following the same, set aside the order of Ld. CIT(A) on this issue and direct the AO to delete the disallowance of interest of Rs.44,10,000/-.

12.

The issue raised in ground No.3 is consequential and need no adjudication.

13.

In the result, the appeal of the Revenue is dismissed and the appeal of the assessee is partly allowed.

Order pronounced in the open court on 20.04.2020.

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