2014 (1) TMI 1401 - AT - Income Tax

Disallownace u/s 14A - Held that - The assessee has interest free funds in the form of capital reserve & surplus and interest free unsecured loans from the promoters - The aggregate of such interest free funds comes to Rs. 5.14 crores - Neither the Assessing Officer nor the learned Commissioner (Appeals) has examined this fact and has applied provisions of rule 8D even on the interest component Decision in Reliance Utilities and Power Ltd 2009 (1) TMI 4 - HIGH COURT BOMBAY followed - If there are interest free funds available to the assessee which is sufficient to meet its investment and at the same time the assessee has also interest bearing funds in the form of loan then it can be presumed that the investment had been made from interest free funds available The issue has been restored for fresh adjudication.

Summary

Issues involved:
Whether the learned Commissioner (Appeals) was justified in confirming the disallowance made by the Assessing Officer under section 14A of the Income Tax Act for the assessment years 2008-09 and 2009-10.

Detailed Analysis:

Issue 1: Disallowance under section 14A of the Act
The assessee challenged the orders passed by the learned Commissioner (Appeals) for the assessment years 2008-09 and 2009-10, confirming the disallowance made by the Assessing Officer under section 14A of the Income Tax Act. The disallowance was for Rs. 26,12,396 for the assessment year 2008-09 and Rs. 27,05,708 for the assessment year 2009-10. The Assessing Officer computed the disallowance under rule 8D, as it was effective from the assessment year 2008-09. The assessee contended that the investment made was strategic and not for earning exempt income, but for business income through catering services. The assessee argued that the investment was made from interest-free funds, including share capital and interest-free loans, which were sufficient for the investment. However, the learned Commissioner (Appeals) upheld the disallowance under section 14A, stating that the provisions applied irrespective of whether income was earned or not. The issue of investment being made from interest-free funds was not conclusively addressed.

Issue 2: Availability of interest-free funds for investment
The assessee, before the tribunal, emphasized that the balance sheet reflected sufficient interest-free funds amounting to Rs. 5.14 crores, exceeding the investment made. The argument was supported by citing relevant court decisions, including CIT v/s Reliance Utilities and Power Ltd. and CIT v/s UTI Bank Ltd., which held that if interest-free funds were available to meet tax-free investments yielding exempt income, it could be presumed that such investments were made from interest-free funds. The Departmental Representative countered by stating that the assessee failed to demonstrate the availability of interest-free funds at the time of investment. The tribunal observed that neither the Assessing Officer nor the learned Commissioner (Appeals) had examined the availability of interest-free funds, despite the assessee's submissions. Citing the binding precedence of relevant court decisions, the tribunal set aside the impugned orders and directed the Assessing Officer to re-examine the availability of interest-free funds. If the assessee's contention was found valid, the interest component in the disallowance calculation under rule 8D had to be removed for both assessment years.

In conclusion, the tribunal partially allowed the assessee's appeals for the assessment years 2008-09 and 2009-10 for statistical purposes, emphasizing the importance of considering the availability of interest-free funds while determining the disallowance under section 14A of the Income Tax Act.