PRAHAM INDIA LLP,MUMBAI vs. ITO 31(2)(5), MUMBAI

Ground no.2, is not pressed, hence, dismissed.

In ground no.1, the assessee has challenged the disallowance of interest expenditure amounting to ` 88.20 lakh.

Brief facts are, for the assessment year under dispute, the assessee firm filed its return of income on 31st March 2016, declaring nil income after claiming loss of ` 1,82,723. During the assessment proceedings, the Assessing Officer noticed that the assessee has borrowed money from Kotak Mahindra Prime Ltd. at interest rate of 15.25% per annum. Whereas, it has advanced loan of ` 20 crore to sister concern at the interest rate of 10.84% per annum and subsequently such loan was converted to preferential shares. Therefore, the Assessing Officer held that the difference in interest rate on the amount borrowed and the amount lent by the assessee works out to 4.41%. Accordingly, computing the differential interest by 3 Praham India LLP applying the aforesaid rate of 4.41%, he made a disallowance of ` 88.20 lakh under section 36(1)(iii) of the Act.

Though, the assessee challenged the aforesaid disallowance before the first appellate authority, however, he also confirmed the disallowance made by the Assessing Officer.

The learned Authorised Representative submitted, Patel Engineering Ltd., to whom the assessee advanced the loan is promoted by the assessee and is a listed company. He submitted that Patel Realty is a 100% subsidiary of Patel Engineering Ltd. Thus, he submitted, assessee being a promoter of Patel Engineering Ltd., the loan advanced / investment made is in connection with assessee’s business activity. He submitted, since the advancement of loan / investment is in connection with assessee’s business, no disallowance out of interest expenditure should have been made. Further, the learned Authorised Representative submitted, it is not a case where the assessee has not charged interest on the loans advanced. He submitted, the assessee has charged interest @ 12% on the loans advanced to the sister concern/subsidiary. Therefore, due to difference in the rate of borrowing between the bank and interest charged, no disallowance under section 36(1)(iii) of the Act should be made. In support of such contention, the learned Authorised Representative relied upon the following decisions:–

The learned Departmental Representative strongly relied upon the observations of the Assessing Officer and learned Commissioner (Appeals).

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 5 Praham India LLP 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.

In the result, assessee’s appeal is allowed. ./2018 Revenue’s Appeal

The effective grounds raised by the Revenue are on the common issue of deletion of disallowance made under section 14A r/w rule 8D by the Assessing Officer.

Brief facts are, in the course of assessment proceedings, the Assessing Officer noticed that during the year the assessee had made investment in shares amounting to ` 64,42,36,391 capable of yielding exempt income by way of dividend. Therefore, he called upon the assessee to explain why disallowance under section 14A r/w rule 8D should not be made. Though, the assessee objected to the disallowance, however, the Assessing Officer rejecting the objections of the assessee proceeded to compute the disallowance under rule

After considering the submissions of the assessee in the context of facts and materials on record, though, learned Commissioner (Appeals) agreed with the Assessing Officer that disallowance under section 14A of the Act has to be made, however, he restricted such disallowance to the exempt income earned during the year amounting to ` 3,663. The balance disallowance was deleted by him.

Before us, learned Departmental Representative submitted, as per the mandate of rule 8D(2), the Assessing Officer has to compute disallowance for earning exempt income. Therefore, learned Commissioner (Appeals) was not justified in restricting the disallowance to the exempt income earned during the year. In support of such contention, he relied upon the decision of the Hon'ble Supreme Court in Maxopp Investment Ltd. v/s CIT, [2018] 402 ITR 640 (SC).

The learned Authorised Representative strongly supporting the decision of learned Commissioner (Appeals) submitted, as per the settled legal principle, disallowance under section 14A of the Act cannot exceed the exempt income earned during the relevant year. In support of such contention, he relied upon the decision of the Hon'ble Delhi High Court in DCIT v/s McDonald India Pvt. Ltd., [2019] 101 taxmann.com 86 (Del.).

We have considered rival submissions and perused the material on record. There is no dispute that in the previous year relevant to the assessment year under dispute, the assessee had earned exempt income by way of dividend amounting to ` 3,663 only. Whereas, the Assessing Officer computed disallowance under rule 8D(2) r/w section 14A at ` 1,97,89,061. As per the settled legal principle, disallowance of expenditure attributable to earning of exempt income in terms of section 14A of the Act cannot exceed the exempt income earned during the year. In this context, we refer to the decision cited by the learned Authorised Representative. That being the case, the order passed by the learned Commissioner (Appeals) on the issue deserves to be upheld. Grounds are dismissed.

In the result, appeal is dismissed.

To sum up, assessee’s appeal is partly allowed and Revenue’s appeal is dismissed. Order pronounced in the open Court on 31.05.2019