2013 (8) TMI 341 - AT - Income Tax

Disallowance u/s 14A - Deduction of interest u/s 36(1)(iii) - Interest expenditure paid to bankers - Held that - First Appellate Authority has deleted the disallowance on the ground that assessee has more surplus interest free funds than the advances and investment. In other words on the record Assessing Officer failed to establish that interest bearing funds were used either for making advances to the sister concern or for investment in the mutual funds. If that be so, then how disallowance can be made. The stand of the Assessing Officer is that assessee should have used its own fund instead of interest bearing borrowings for running the business. In our opinion, Assessing Officer cannot force the assessee to earn interest income or save interest expenses for running the business. The Assessing Officer was unable to demonstrate that interest bearing loans were used by the assessee other than business purpose - Following decision of S.A. Builders Ltd. Vs. CIT 2006 (12) TMI 82 - SUPREME COURT - Decided against Revenue.

Summary

Issues:
Disallowance under section 14A of the Income Tax Act, 1961 for assessment year 2004-05.

Analysis:
The Appellate Tribunal ITAT Delhi heard an appeal by the revenue against the CIT(A) order for the assessment year 2004-05. The main issue was the disallowance of Rs. 32,05,767 under section 14A of the Income Tax Act. The Assessing Officer found that the assessee had made fresh investments in mutual funds and advances to sister concerns without charging interest. The Assessing Officer disallowed the interest expenses claimed by the assessee. On appeal, the CIT(A) deleted the disallowance, stating that the assessee had surplus cash even after making investments and providing interest-free advances. The Tribunal noted that the Assessing Officer failed to establish that interest-bearing funds were used for making advances or investments. The Tribunal held that the Assessing Officer cannot force the assessee to earn interest income or save interest expenses for business purposes. The Tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal.

In summary, the Tribunal ruled in favor of the assessee, holding that there was no evidence to support the disallowance under section 14A of the Income Tax Act. The decision emphasized the availability of surplus cash with the assessee and the lack of proof that interest-bearing funds were diverted for non-business purposes. The Tribunal concluded that the Assessing Officer's argument that the assessee should have used its own funds instead of interest-bearing borrowings was unfounded, leading to the dismissal of the revenue's appeal.