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Issues involved: Disallowance of interest debited to profit and loss account for investments made for earning exempt dividend income.
Summary: The appeal was against the order confirming the disallowance of interest debited to profit and loss account for investments made for earning exempt dividend income. The Assessing Officer disallowed a pro rata interest amount as the interest attributable to the investment made for earning dividend income was not considered allowable from business profits. The CIT(A) upheld the disallowance citing precedents and lack of business purpose in the investment. However, the appellant contended that the investments were made from internal accruals and not borrowed funds, supported by the significant profits earned in previous years. The Tribunal found that no similar disallowance was made in earlier years and held that the investment was made from internal accruals, thus deleting the addition of notional interest on the quantum of investment made in shares under Section 14A. The appeal of the assessee was allowed. In the circumstances, the Tribunal held that unless the assessing officer proves that borrowed funds were actually utilized for making investments in shares, no adhoc disallowance can be made under Section 14A. The decision was supported by the Punjab and Hariyana High Court case of Hero Cycles Ltd. The Tribunal found that the appellant's significant profits and accumulated resources indicated that the investments were made from internal accruals, leading to the deletion of the addition of notional interest on the investment made in shares. The appeal of the assessee was allowed, and the addition of notional interest was deleted under Section 14A.
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