2014 (8) TMI 1137 - AT - Income Tax

Addition u/s 14A - sufficiency of own funds - Held that - We find that assessee has sufficient own capital which does not bear any interest. Assessee had capital amounting to ₹ 222 crores and investment made by the assessee were only ₹ 35 crores. The ld. CIT(A) himself accepted that assessee is having sufficient own funds as capital as compared to investments yielding exempt income. In these circumstances we hold that since the assessee has sufficient own capital to make investment for earning exempt income no portion of interest from borrowed capital should be allocated to earn exempt income in this case. Accordingly this appeal of the assessee is partly allowed.

Summary

Issues:
1. Applicability of Rule 8D of the Income Tax Rules, 1962 in disallowance under section 14A of the Income Tax Act, 1961.
2. Disallowance of expenses for earning exempt income based on borrowed funds allocation.

Analysis:
1. The appeal was against the order of the ld. C.I.T.(A)- VI, Kolkata regarding the applicability of Rule 8D in disallowing a sum under section 14A of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed a specific amount under Rule 8D, which included interest allocation and a percentage of the average value of investments. The assessee contested this disallowance before the ld. CIT(A) on the grounds of strict requirement and incorrect computation. However, the ld. CIT(A) upheld the disallowance, considering the utilization of loan funds for investments despite having substantial own capital. The assessee then appealed to the Appellate Tribunal.

2. The main argument presented was that the assessee had sufficient own funds and did not utilize borrowed funds for investments, challenging the interest expenditure allocation towards earning exempt income. The counsel for the assessee contended that loans were obtained for specific purposes and not for investments, thus objecting to the interest allocation. The Tribunal examined the submissions and records, noting the substantial own capital of the assessee compared to the investment amount. It was observed that the assessee's own capital was significantly higher than the investments generating exempt income. Consequently, the Tribunal held that no interest from borrowed capital should be allocated towards earning exempt income in this scenario, partially allowing the appeal.

In conclusion, the Appellate Tribunal partly allowed the appeal filed by the assessee, ruling that no portion of interest from borrowed capital should be allocated to earn exempt income due to the sufficient own capital available for investments.