2013 (10) TMI 1076 - AT - Income Tax

Disallowance u/s 14A of the Income Tax Act Held that - Assessee had sufficient profit, capital and reserves which are more than investment made by the assessee in mutual fund, it cannot be presumed that investment in mutual fund made by the assessee were out of interest bearing borrowed funds - Hon. Supreme Court in the case of Munjal Sales Corporation vs. CIT 2008 (2) TMI 19 - Supreme Court (SC) held that where the assessee had capital and profits more than the interest free funds advanced then it has to be presumed that such interest free advances were given out of interest free capital available with the assessee - Hon ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd 2009 (1) TMI 4 - HIGH COURT BOMBAY held that if there are funds available, both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest free funds were sufficient to meet the investments Decided in favor of Assessee.

Summary

Issues:
- Disallowance under Section 14A of the Income Tax Act
- Retrospective invocation of Rule 8D of the Income Tax Rules
- Ground for addition of short credit of interest income

Disallowance under Section 14A:
The case involved an appeal by the Assessee against the order of CIT(A)-XX, Ahmedabad for A.Y. 2007-08. The Assessee, a company engaged in manufacturing precipitated Silica, filed its return of income declaring total income of Rs 5,42,79,162/-. The Assessing Officer (AO) framed the assessment u/s 143(3) determining the total income at Rs 5,56,19,260/-. The Assessee contested the disallowance made under Section 14A of the Act, which was upheld by the CIT(A). The Assessee argued that no disallowance was warranted as investments were made from own funds, not borrowed funds. The Tribunal noted the reduction in investments at year-end and the substantial interest-free funds available to the Assessee. Citing precedents, the Tribunal held that no disallowance u/s 14A was justified, directing the deletion of the disallowance.

Retrospective Invocation of Rule 8D:
The Assessee challenged the retrospective invocation of Rule 8D of the Income Tax Rules, which came into effect from 24.03.2008. The AO applied Rule 8D to calculate the disallowance u/s 14A, leading to the Assessee's appeal. The Tribunal, considering the facts and legal precedents, concluded that no disallowance was warranted under Section 14A, thereby rejecting the retrospective application of Rule 8D.

Ground for Addition of Short Credit of Interest Income:
The third ground raised by the Assessee related to the addition of Rs. 4,506 made by the AO for short credit of interest income. This ground was not seriously argued by the Assessee before the Tribunal and was dismissed as not pressed. Consequently, the appeal of the Assessee was partly allowed, with the Tribunal directing the deletion of the disallowance u/s 14A. The judgment was pronounced in Open Court on 20-09-2013.