2014 (10) TMI 928 - AT - Income Tax

Disallowance u/s. 14A - whether the assessee has utilized interest bearing unsecured loans for investment in shares of companies/bank? - Held that - For making the disallowance u/s. 14A it is required that there must be definite nexus between the expenditure incurred for earning the exempted income. However, in the present case, the assessee was having adequate interest free funds in the form of shareholders funds and reserved & surplus to back up the investment in shares, the funds available were of ₹ 56,36,54,029/- against the investment of ₹ 13,41,32,097/-. In the instant case, the Assessing Officer did not bring any cogent material on record to substantiate that the assessee incurred any expenditure to earn the exempted income. On the contrary, the explanation of the assessee was that all the DDs/cheques for the dividend received were payable at par and no other expenditure was incurred, the said explanation was not rebutted. The investment in the shares was made by the assessee from the interest free shareholders funds and reserved & surplus and no nexus was established by the Assessing Officer to substantiate that the assessee incurred any expenditure to earn dividend income. On the contrary, the Ld. CIT(A) has given categorical finding that the Assessing Officer had not proved that the borrowed funds were invested in the shares or brought the valid satisfaction supported by the cogent reasons to determine the expenses under Rule 8D. The said categorical finding given by the Ld. CIT(A) has not been rebutted. Therefore, we do not see any valid reason to interfere with the findings of the Ld. CIT(A). - Decided in favour of assessee

Summary

Issues Involved:
1. Deletion of disallowance under Section 14A of the Income Tax Act, 1961.
2. Satisfaction of the Assessing Officer (AO) regarding the correctness of the claim of expenditure related to exempt income.

Issue-Wise Detailed Analysis:

1. Deletion of Disallowance under Section 14A of the Income Tax Act, 1961:
The primary issue in these appeals is the deletion of the disallowance made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, 1961. The AO had disallowed Rs. 32,14,818/- on account of expenditure claimed to be related to earning exempt dividend income. The AO noticed that the assessee received dividend income of Rs. 18,33,158/- and had shown investments totaling Rs. 13,41,32,097/- while claiming interest expenses of Rs. 1,36,90,516/-. The AO invoked Section 14A r.w.r. 8D of the Income Tax Rules, 1962, asserting that the assessee utilized interest-bearing unsecured loans for these investments.

The assessee contended that it had sufficient owned funds to cover the investments and that no interest-bearing funds were used for making these investments. The assessee also argued that no specific expenditure was incurred to earn the dividend income, as all dividend cheques/DDs were payable at par. The CIT(A) accepted the assessee's explanation and deleted the disallowance, noting that the investments were adequately backed by interest-free funds and that the AO had failed to prove any nexus between borrowed funds and the investments.

2. Satisfaction of the Assessing Officer Regarding the Correctness of the Claim of Expenditure Related to Exempt Income:
The AO's satisfaction regarding the correctness of the claim of expenditure related to exempt income is a crucial aspect under Section 14A. The AO must provide cogent reasons for rejecting the assessee's claim. In this case, the CIT(A) observed that the AO did not provide any satisfactory reasons or evidence to show that the borrowed funds were used for making the investments or that any specific expenditure was incurred to earn the exempt income. The CIT(A) relied on several judicial precedents, including the decisions of the Hon'ble Bombay High Court in CIT Vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 and the Hon'ble Punjab & Haryana High Court in CIT Vs. Hero Cycles Ltd. (2010) 323 ITR 518, which support the principle that if interest-free funds are sufficient to cover the investments, it should be presumed that the investments were made out of interest-free funds.

The Tribunal upheld the CIT(A)'s decision, noting that the AO did not bring any cogent material on record to substantiate the claim that the assessee incurred any expenditure to earn the exempt income. The Tribunal also emphasized that the AO disallowed more than what was earned by the assessee, which is not justified.

Conclusion:
The Tribunal dismissed the Department's appeals, affirming the CIT(A)'s deletion of the disallowance under Section 14A. The Tribunal concluded that the AO failed to provide sufficient reasons or evidence to prove the nexus between borrowed funds and the investments, and the investments were adequately backed by interest-free funds. Therefore, the disallowance was not justified.