×Latest Case Laws on Income Tax by various Income Tax Appellate Tribunals in India
These are the latest case laws decided by various Income Tax Appellate Tribunals (ITAT) of India on Income Tax which have been published recently. The case laws are open for discussion and we invite expert comments from our members on its applicability and effect on relevant issues.
14-05-2019, Devakikrishna Keshav Prabhu, Section 14A, 8D(2)(ii), Tribunal Pune
This appeal by the assessee arises out of the order passed by the CIT(A)-3, Pune on 05-06-2018 in relation to the assessment year 2009-10.
2. There is a delay of 33 days in presenting this appeal before the Tribunal. The assessee has filed an affidavit in support of the reasons which led to the filing of the instant appeal belatedly. I am satisfied with the reasons. As such the delay is condoned and the appeal is taken up for disposal on merits.
3. The assessee has filed revised grounds. Ground nos. 1 to 3 are against confirmation of disallowance u/s.14A of the Incometax Act, 1961 (hereinafter also called ‘the Act’).
4. Briefly stated, the facts of the case are that the assessee is engaged in the manufacturing of marine parts, reselling and exports. Exempt dividend income from mu ual funds and shares was received during the year to the tune of Rs.22,09,471/-. No disallowance u/s.14A was offered. On being called upon to explain the reasons for not offering any such disallowance, the assessee filed certain replies with which the Assessing Officer (AO) was not satisfied. Invoking the provisions of section 14A of the Act, he computed disallowance at Rs.7,62,226/- as per rule 8D(2)(ii) and 8D(2)(iii). The ld. CIT(A) upheld the disallowance. The assessee is aggrieved by the confirmation of disallowance.
5. I have heard both the sides and gone through the relevant material on record. It is seen that the AO has made disallowance under Rule 8D(2)(ii) at Rs.2,73,504/- towards interest paid. Copy of assessee’s balance sheet has been placed at page 19 of the paper book from which it can seen that the assessee, an individual, has capital of Rs.13.40 crore. As against that, the balance of Investment accounts stands at Rs.10.08 crore.
6. Section 14A read with rule 8D(2)(ii) stipulates that in a case where the assessee has incurred expenditure by way of interest during the year which is not directly attributable to any particular income, the disallowance shall be made for an amount computed in accordance with the formula given therein. Sum and substance of disallowance under Rule 8D(2)(ii) is that the interest relatable to investments/securities yielding exempt income is to be disallowed.
7. At this juncture, it is relevant to note that section 36(1)(iii) provides for deduction of interest of the amount of interest paid in respect of capital borrowed for the purpose of business or profession. The essence of this provision is that the interest should be allowed so long as the capital borrowed, on which such interest is paid, is used for the purpose of business or profession. If, however, an assessee is having its own interest free surplus funds and such funds are utilised as interest free advances even for a non-business purpose, there cannot be any disallowance of interest paid on interest bearing loans. The Hon'ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), has held that where an assessee possessed sufficient interest free funds of its own which were generated in the course of relevant financial year, apart from substantial shareholders’ funds, presumption stands established that the investments in sister concerns were made by the assessee out of interest free funds and, therefore, no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. In that case, the AO recorded a finding that a sum of Rs.213 crore was invested by the assessee out of its own funds and Rs.1.74 crore out of borrowed funds. Accordingly, disallowance of interest was made to the tune of Rs.2.40 crore. The assessee argued that no part of interest bearing funds had gone into investment in those two companies in respect of which the AO made disallowance of interest. It was also argued that income from operations of the company was Rs.418.04 crore and the assessee had also raised capital of Rs.7.90 crore, apart from receiving interest free deposit of Rs.10.03 crore. The assessee submitted