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2016 (6) TMI 1262 - AT - Income TaxAddition u/s 14A - Held that - In absence of direct nexus between the interest bearing fund and investment in shares, no disallowance can be made by the Assessing Officer U/s 14A. Accordingly, we reverse the order of the ld CIT(A) and allow the assessee s appeal.
Issues Involved:
1. Non-compliance with ITAT Jaipur's directive to establish the nexus between borrowed funds and investment in shares. 2. Non-adherence to the Bombay High Court's ruling in Reliance Utilities & Power Ltd. regarding interest disallowance. 3. Disallowance of interest under Section 14A read with Rule 8D of the Income Tax Act. Detailed Analysis: Issue 1: Non-compliance with ITAT Jaipur's Directive The assessee argued that the Assessing Officer (AO) erred by not following the ITAT Jaipur's directive to establish the nexus between borrowed funds and investment in shares. The AO disallowed the interest without establishing this nexus, contrary to the ITAT's instructions. The assessee claimed that there was no nexus between the borrowed funds and investment in shares, asserting that the firm had interest-free funds. The AO, however, maintained that the assessee failed to provide specific details regarding the dates of investment and availability of funds, thus justifying the disallowance under Section 14A. Issue 2: Non-adherence to Bombay High Court's Ruling The assessee contended that the AO did not follow the Bombay High Court's ruling in Reliance Utilities & Power Ltd., which is binding and authoritative. The AO's decision to disallow interest without establishing the nexus was deemed incorrect by the assessee. The CIT(A) upheld the AO's decision, relying on various judicial precedents, including the Delhi High Court's decision in Taikisha Engineering India Ltd., which supports disallowance under Section 14A if the AO is unsatisfied with the assessee's claim. Issue 3: Disallowance of Interest under Section 14A The AO disallowed the interest under Section 14A read with Rule 8D, arguing that the assessee failed to prove the availability of interest-free funds for investment in shares. The CIT(A) supported this view, emphasizing that the assessee's funds were mixed and the specific source of investment in shares was not provided. The AO's disallowance was based on the proportionate expenses allocated against the income earned from such investments. Judgment Analysis: The ITAT examined the fund flow statements and found that the borrowed funds were utilized in business assets and not in the investment of shares. The ITAT noted that the investments in shares were made between AY 1992-93 to AY 2001-02, and no new investments were made during the relevant assessment year. The ITAT highlighted that the assessee did not earn any dividend income during the year, thus supporting the argument that no disallowance under Section 14A is warranted in the absence of exempt income. The ITAT referenced the Delhi High Court's ruling in Cheminvest Ltd., which stated that Section 14A disallowance requires actual receipt of exempt income. The ITAT concluded that there was no direct nexus between the interest-bearing funds and the investment in shares, thus reversing the CIT(A)'s order and allowing the assessee's appeal. Conclusion: The ITAT ruled in favor of the assessee, emphasizing the absence of a direct nexus between borrowed funds and investment in shares, and the lack of exempt income during the relevant assessment year. The appeal was allowed, and the disallowance under Section 14A was reversed.
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