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Facts
The assessee, M/s Knitwell India Pvt. Ltd., engaged in manufacturing, filed its return of income for AY 2014-15. The AO observed investments in equity instruments and advances for plot/flats, leading to disallowances of interest expenses under Section 36(1)(iii) and Section 14A, including a sum of Rs.1,42,842/- under Rule 8D(iii). Additionally, the AO made an ad-hoc disallowance of Rs.8,13,317/- for Directors' foreign travel expenses, both of which were confirmed by the CIT(A).
Held
The Tribunal held that since the assessee had sufficient interest-free funds exceeding the investments and advances, no interest disallowance under Section 36(1)(iii) and Section 14A was warranted, except for Rs.1,42,842/- representing administrative expenses under Rule 8D(iii). Regarding the foreign travel expenses, the Tribunal found that the AO failed to appreciate the business exigency given the assessee's substantial turnover, thereby deleting the disallowance.
Key Issues
Whether disallowance of interest expenditure under Section 36(1)(iii) and Section 14A read with Rule 8D is justified when the assessee possesses adequate interest-free funds. Whether an ad-hoc disallowance of Directors' foreign travel expenses is valid given the business exigencies and significant turnover of the assessee.
Sections Cited
Section 36(1)(iii), Section 14A, Rule 8D, Section 143(2)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DIVISION BENCH, ‘A’ CHANDIGARH
Before: SHRI RAJPAL YADAV & SHRI MANOJ KUMAR AGGARWAL
आयकर अपील�य अ�धकरण,च�डीगढ़ �यायपीठ, च�डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, ‘A’ CHANDIGARH BEFORE SHRI RAJPAL YADAV, VICE PRESIDENT AND SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER आयकर अपील सं./ �नधा�रण वष� / Assessment Year. : 2014-15 M/s Knitwell India Pvt. Ltd., The DCIT, Plot No. 278, Industrial Area, Vs Circle 1(1), Phase-II, Chandigarh. Chandigarh. �थायी लेखा सं./PAN NO: AACCK4673L अपीलाथ�/Appellant ��यथ�/Respondent Assessee by : Ms. Shruti Khandelwal, Advocate Revenue by : Shri Vivek Vardhan, Addl. CIT Sr.DR Date of Hearing : 24.11.2025 Date of Pronouncement : 27.01.2026 O R D E R PHYSICAL HEARING PER RAJ PAL YADAV, VP
The assessee is in appeal against the order of ld.CIT (Appeals) dated 25.10.2018 passed for assessment year 2014-15.
Ground No. 1 is general in nature which does not call for recording of any specific finding.
Ground Nos. 2 and 3 are inter-connected with each other, therefore, we take them together. The grievance of the assessee A.Y. 2014-15 2 is that ld.CIT (Appeals) has erred in confirming the addition of Rs.5,38,557/- u/s 14A and addition of Rs.3,43,854/- which was added with the aid of Section 36(1)(iii) of the Income Tax Act.
The brief facts of the case are that assessee, at the relevant time was engaged in manufacturing of tractor parts, harvesting combine parts and fork lift parts. It has filed its return of income on 27.09.2014 declaring total taxable income of Rs.4,51,31,690/-. The case of the assessee was selected for scrutiny assessment and necessary notice u/s 143(2) was issued and served upon the assessee. During the course of assessment proceedings, ld. AO had observed that assessee had made an investment of Rs.2,73,96,098/- in Equity Instruments. Similarly, it has given advance of Rs.2,26,69,352/- to various persons for purchase of plot/flats. The AO was of the view that interest expenses relatable to the investments made in equity shares and funds advanced without any business purpose deserve to be calculated and disallowed to the assessee. The AO, thereafter, examined financials of the assessee and observed that average indirect cost during the year deserves to be disallowed to the assessee after working out a disallowance u/s Section A.Y. 2014-15 3 36(1)(iii) of the Act. Such discussion has been made on page No. 5 of the assessment order.
4.1 Similarly, he disallowed the interest expenditure earning for tax free income on equity investment with the aid of Section 14A of the Income Tax Act. The AO also disallowed 0.5% of flat investment in sub-clause (iii) of Rule 8D of the formula. This amount has been worked out at Rs.1,42,842/-.
On appeal, the ld.CIT (Appeals) has confirmed the disallowances and ld. First Appellate Authority has followed the order of his predecessor in assessment year 2013-14.
With the assistance of ld. Representative, we have gone through the record carefully. The case of the assessee is that it has far more interest free funds than the interest free advances given by it to various persons or investment made in equities. The assessee has returned income of Rs.451.32 lacs. He also made reference to the order of the ITAT passed in assessment year 2013-14 whose copy is placed at page No. 71 of the Paper Book. The Tribunal in assessment year 2013-14 did not concur with the view point of the CIT (Appeals) and held that if assessee has more interest free funds than the investments made in equity A.Y. 2014-15 4 shares or interest free advances given to individuals, then no interest expenditure ought to be disallowed to the assessee. The Tribunal was of the view that when mixed funds are there, then it is to be presumed that such investments have been made from the surplus funds available with the assessee. For harbouring this belief, Tribunal has made reference to the decision of the Hon'ble Supreme Court in the case of Reliance Utilities & Power Ltd. reported in 313 ITR 340. Apart from the above, we are fortified with following decisions : a) ACIT Vs Janak Global Resources Pvt. Ltd. 175 ITD 365 (Chd) b) Bright Enterprises (P) Ltd Vs CIT 381 ITR 107 (P&H.) c) CIT Vs Kapson Associates 381 ITR 204 (P&H.) d) CIT Vs Max India Ltd. 398 ITR 209 (Pb.) e) CIT Vs Max India Ltd (2016) 388 ITR 81 (P&H) f) Gordrej & Boyce Manufacturing Co. Ltd Vs DCIT (2017) 394 ITR 449 (SC) g) CIT Vs Reliance Ind Ltd. 410 ITR 466 (SC) h) CIT V/s Shapoorji Pallongi & Co 423 ITR 220 (Bom) i) Decision of ITAT Chandigarh in These decisions are on the same line, therefore, no disallowance deserves to be upheld except a sum of Rs.1,42,842/- which is an amount representing administrative expenses for taking care of investments made in equities. This amount deserves to be A.Y. 2014-15 5 disallowed to the assessee with the aid of Section 14A read with Rule 8D(iii) of the Act. Accordingly, Ground No. 2 is partly allowed whereas ground No. 3 is allowed.
Ground No. 4
In this ground of appeal, grievance of the assessee is that ld.CIT (Appeals) has erred in confirming the adhoc disallowance of Rs.8,13,317/-.
8. The brief facts of the case are that assessee has debited an expenditure of Rs.8,13,317/- on account of Directors’ foreign traveling. The break-up of this amount has been noted in paragraph No. 2 of the assessment order. The AO was of the view that assessee failed to demonstrate administrative exigency for Directors visiting the foreign countries. The ld.CIT (Appeals) has confirmed the disallowance. The ld. counsel for the assessee pointed out that no specific defects have been pointed out in the books. These expenses were incurred on account of administrative exigencies. On the other hand, ld. DR relied upon the orders of revenue authorities.
9. We have duly considered the rival contentions and gone through the record carefully. The AO ought to have appreciated A.Y. 2014-15 6 the facts and circumstances with the angle of a businessman as to how he would examine these expenses. He failed to appreciate the taxable income of the assessee at Rs.451.31 lacs. It itself suggests that assessee has a huge turnover which has generated taxable income of this magnitude. It would have undertaken necessary visits for technology and participating in various foreign exhibitions or business events. Therefore, we are of the view that AO has miserably failed to appreciate the nature of the expenses looking into the magnitude of the business conducted by the assessee. Accordingly, we allow this ground of appeal and delete the disallowance.
In the result, appeal of the assessee is partly allowed.