2013 (1) TMI 809 - HC - Income Tax

Disallowance of ₹ 6,62,50,000/- u/s. 14A - Interest expenditure - Held that - there has to be nexus between the borrowed fund and investment made and the same can be established only when it is shown that interest free funds were not available with the assessee - there was sufficient interest free funds available with the assessee and Department failed to establish the link between the borrowed fund and the investment made by the assessee in the equity shares, addition made on account of disallowance of ₹ 6,62,50,000/- by AO has been deleted - assessee had not used borrowed funds, for the purpose of investment in equity shares - Tribunal has allowed the interest free expenses incurred for earning the dividend and allowed the deduction under Section 80M

Summary

Issues:
Challenge to the order of the Income Tax Appellate Tribunal under Section 260A regarding disallowance of &8377; 6,62,50,000 under Section 14A of the Income Tax Act, 1961.

Analysis:
1. The Revenue challenged the Tribunal's order deleting the addition made on account of disallowance under Section 14A of the Act. The Tribunal noted the nexus between borrowed funds and investments, emphasizing the need to show the unavailability of interest-free funds with the assessee to establish the link.

2. The assessee, a State Government-owned company, faced scrutiny for the Assessment Year 2004-05, with the Assessing Officer adding interest expenditure on exempted income of &8377; 6,62,50,000. The CIT(A) later allowed the appeal and deleted the addition, a decision upheld by the Tribunal based on the Maruti Udyog Ltd case.

3. The Tribunal held that the investment in equity shares with tax-free returns could amount to a diversion of business funds. The Tribunal's decision was challenged by arguing that the investment in such shares should not be permissible under Section 14A, as it disregarded the diversion of business fund aspect.

4. Section 14A prohibits deductions for expenditure related to income not included in the total income. The Tribunal rightly deleted the addition, as the Revenue failed to establish a nexus between borrowed funds and investments in equity shares, especially when interest-free funds were available with the assessee.

5. Referring to the case of Commissioner of Income Tax vs. Raghuvir Synthetics Ltd., it was emphasized that the Department must prove the nexus between interest-bearing funds borrowed and investments made by the assessee. The judgment in the case of Commissioner of Income-Tax vs. Kribhco further supported the assessee's position.

6. Ultimately, the Tribunal correctly allowed the interest-free expenses incurred for earning dividend income, leading to the deduction under Section 80M. The Revenue's failure to prove that the borrowed funds were used for earning dividend income justified the deletion of the sum under Section 14A.

7. The judgment highlights the importance of establishing a clear nexus between borrowed funds and investments to determine tax liability. In this case, as the respondent did not utilize borrowed funds for investments, the Tribunal's decision to dismiss the Tax Appeal was upheld.

8. Consequently, the Tax Appeal was dismissed, affirming the decision to delete the addition made under Section 14A. The judgment underscores the necessity for the Revenue to establish a direct link between borrowed funds and investments to justify tax implications accurately.