2011 (3) TMI 1440 - HC - Income Tax

Dis-allowance of interest on borrowed funds u/s. 14A assessee contended that majority of its investment if tax free securities were made before F.Y.97-98 thus amount invested in tax free securities are not from borrowed funds - Held that - Assessee had demonstrated that it has utilized its own funds for the purpose of making investment in shares etc. from which tax free income were earned. It is also not in dispute that the interest bearing borrowed funds were utilized for its own business purposes from which taxable income were earned by the assessee. CIT(Appeals) and Tribunal both on facts found that the assessee did not invest borrowed fund for earning interest free income applying provision of Section 14A for taxing such interest was not justified - Decided in favor of assessee

Summary

Issues:
1. Disallowance of interest on borrowed funds under Section 14A of the Income Tax Act.
2. Deletion of addition on account of provision of wealth tax while computing profit under Section 115B of the Act.

Analysis:

Issue 1: Disallowance of interest on borrowed funds under Section 14A of the Income Tax Act:
The dispute arose when the Assessing Officer disallowed the deduction of interest paid on borrowed funds under Section 14A of the Act, adding it back to the total income of the assessee. The assessee contended that the borrowed funds were not utilized for investments in tax-free securities, thus Section 14A did not apply. The CIT(A) accepted the explanation, stating that the borrowed funds were entirely used for business purposes, making the interest paid eligible for deduction under Section 36(1)(iii) of the Act. The tribunal upheld the CIT(A)'s decision, emphasizing that the borrowed funds were not used for tax-free investments, and the assessee had arranged its affairs legally to reduce tax liability. The tribunal rejected the Revenue's argument that interest on borrowed funds should be disallowed if used for earning tax-free income, as the borrowed funds were utilized for the assessee's business purposes. The tribunal dismissed the Revenue's appeal, concluding that the assessee's tax liability reduction strategy was legitimate.

Issue 2: Deletion of addition on account of provision of wealth tax while computing profit under Section 115B of the Act:
The tribunal found that the total impact on revenue for this issue was minimal, amounting to 10,700/-. Therefore, the tribunal decided not to consider the question raised regarding the provision of wealth tax while computing profit under Section 115B of the Act. Consequently, the tribunal dismissed the tax appeal on this ground.

In conclusion, the High Court upheld the tribunal's decision, dismissing the tax appeal concerning the disallowance of interest on borrowed funds under Section 14A of the Income Tax Act and the deletion of addition related to the provision of wealth tax while computing profit under Section 115B of the Act.