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2010 (11) TMI 705 - AT - Income TaxDisallowance u/s.14A - Rule 8D of rules - A nexus is required to be established between the investments and the borrowings - assessee has borrowed funds an advance on a lower rate of interest. After discussing the details of advance to certain parties a proportionate interest expense disallowance of Rs.5,15,689/- was made - In the case of Reliance Utilities and Power Ltd. (2009 -TMI - 32150 - HIGH COURT BOMBAY). Once the Hon ble Court has taken a view that the assessee possessed sufficient interest-free funds of its own, then the presumption stands established that the investment towards alleged interest-free funds were out of the available interest-free reserves - It was held that no part of interest on borrowings should be disallowed on the basis that the investments were made out of interest bearing funds - Decided in favour of the assessee by way of remand to AO
Issues Involved:
1. Disallowance under Section 94(7) of the Income Tax Act. 2. Disallowance of preliminary expenses under Section 35D of the Income Tax Act. 3. Disallowance under Section 14A of the Income Tax Act. 4. Disallowance of deduction under Section 80HHC of the Income Tax Act. 5. Disallowance of interest expenses. 6. Restriction of addition under Section 14A of the Income Tax Act. Issue-wise Detailed Analysis: 1. Disallowance under Section 94(7) of the Income Tax Act: The assessee's appeal included a ground regarding the disallowance under Section 94(7) amounting to Rs. 2,070. However, the assessee's representative chose not to press this ground, leading to its dismissal. 2. Disallowance of preliminary expenses under Section 35D of the Income Tax Act: Similarly, the ground concerning the disallowance of preliminary expenses under Section 35D, restricted by the CIT(A) to Rs. 2,160, was not pressed by the assessee's representative and was consequently dismissed. 3. Disallowance under Section 14A of the Income Tax Act: The assessee contested the disallowance of Rs. 10,000 under Section 14A, which was upheld by the CIT(A). The CIT(A) noted that while the assessee had sufficient interest-free funds, some administrative expenses related to earning dividend income needed to be disallowed. The ITAT referenced the Bombay High Court's decision in Godrej and Boyce Mfg. Co. Ltd. vs. Dy.CIT, which emphasized the need for the Assessing Officer (AO) to establish a nexus between investments and borrowings and to determine disallowance only if not satisfied with the expenditure claimed. The ITAT remanded the issue back to the AO for a fresh determination, stressing the importance of following the guidelines set by the Bombay High Court and other relevant precedents. 4. Disallowance of deduction under Section 80HHC of the Income Tax Act: The assessee's claim for deduction under Section 80HHC amounting to Rs. 13,64,232 was disallowed by the AO after adjustments, resulting in a NIL deduction. The CIT(A) upheld this disallowance. However, the ITAT referred to its own previous decisions in the assessee's case for earlier assessment years, which had remanded similar issues back to the AO with directions. Following this precedent, the ITAT restored the matter to the AO for a fresh decision in line with the directions from past orders. 5. Disallowance of interest expenses: The Revenue appealed against the CIT(A)'s deletion of a disallowance of Rs. 5,15,689 made on account of interest expenses. The AO had disallowed this amount, citing that the assessee had advanced funds at a lower interest rate. The CIT(A) found that the assessee had sufficient interest-free funds to cover the advances. The ITAT upheld the CIT(A)'s decision, referencing the Bombay High Court's ruling in Reliance Utilities and Power Ltd., which established that if an assessee has sufficient interest-free funds, it can be presumed that investments were made from these funds. 6. Restriction of addition under Section 14A of the Income Tax Act: The Revenue also contested the CIT(A)'s restriction of the addition under Section 14A to Rs. 10,000. Since this issue was connected to the broader question of the correct application of Section 14A, which had already been remanded back to the AO, the ITAT similarly restored this ground to the AO for a fresh determination. Conclusion: Both the assessee's and the Revenue's appeals were partly allowed. The ITAT remanded several issues back to the AO for fresh consideration, following the guidelines and precedents set by higher judicial authorities. The order was signed, dated, and pronounced in court on 26.11.2010.
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