The Delhi Bench of Income Tax Appellate Tribunal ( ITAT ) has held that bank charges and bank guarantee charges do not partake in the character of interest and had been wrongly included as interest while making disallowance under section 14A of the Income Tax Act, 1961.
Advance Valves Pvt. Ltd, the appellant/assessee company filed its return of income at Rs.7,86,28,030 on 30.11.2013. The case was selected for scrutiny assessment and the assessment was framed. The Assessing Officer noticed that the assessee invested in a partnership firm. The income derived therefrom was not includible in the taxable income of the assessee.
The Assessing Officer issued a show-cause notice as to why provisions of section 14A r.w. Rule 8D of the Income Tax Rules, 1962 should not be invoked and disallowances are made accordingly.
The assessee filed contended that it has already disallowed a sum equal to 0.5% of average investments considering the expenses attributable to investments. It had sufficient interest-free funds for investments hence, in respect of interest, no disallowance is called for. The status of the non-interest-bearing funds. However, the Assessing Officer did not accept the contentions of the assessee and proceeded to make disallowance under section 14A of the Income Tax Act. The AO made an addition of Rs.9,06,947.
The assessee preferred to appeal before Commissioner of Income Tax (Appeals) who sustained both the addition. The assessee contended that it had sufficient interest-free funds for making the investments therefore, no disallowance should have been made. The Assessing Officer had wrongly computed the disallowance as he included the bank charges and bank guarantee charges as interest. The CIT(A) which held that bank charges and bank guarantee charges are part and parcel of interest and sustained the addition made by the assessing authority.
The two-member bench of G.S. Pannu (Vice President) and Kul Bharat (Judicial Member) has observed that the assessee had disallowed the expenditure related to administrative expenses. Concerning the disallowance of the interest, it was stated that the assessee was having sufficient interest-free funds and also it was stated that the AO had wrongly computed the disallowance by including the bank charges and bank guarantee charges.
The tribunal held that CIT(A) as well as the assessing authority has not brought any material suggesting that the interest-free funds were diverted for earning tax-free income. The ITAT deleted the disallowance under section 14 A of the Income Tax Act made in respect of interest expenditure.
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