2014 (5) TMI 115 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D of the Act Disallowance of interest expenses Held that - Relying upon The Commissioner of Income Tax Versus Reliance Utilities & Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY if there are funds available, both interest free and overdraft/loans taken, then presumption would arise that investments would be out of the interest free fund generated or available with the assessee - the contention of the assessee is accepted that the major investments were made by the assessee in AY 2005-06 - Total investment in AY 2005-06 was of Rs.7.20 crores as against which capital and free reserves were of Rs.27.00 crores - capital & free reserves exceeded investment - Borrowings were from banks in the form of export bill discounting and packing credit - The two borrowings were for export business of the assessee and could not be said to be diverted for the purpose of investment in shares - the investments in the shares were made from the interest free funds available with the assessee and not from the interest bearing funds thus, no disallowance is called for in relation to interest expenditure under rule 8 D(ii) of the I.T. Rules Decided in favour of Assessee. Disallowance of administrative expenses Held that - There is no reason to interfere in the order as the assessee himself offered disallowance of 0.5% of the average investment Decided against Assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act.
2. Applicability of Section 14A when no exempt income is claimed.
3. Nexus between investments and surplus funds.
4. Investments in private limited companies and cooperative banks.
5. Consideration of various decisions by the ITAT.
6. Disallowance under Rule 8D(2)(iii) for administrative expenses.

Detailed Analysis:

Issue 1: Disallowance under Section 14A read with Rule 8D of the Income Tax Act
The primary issue in the appeal was the disallowance of Rs.21,03,784/- under Section 14A read with Rule 8D. The Assessing Officer (AO) noted that the assessee earned a dividend income of Rs.2000/- but did not claim it as exempt. Despite this, the AO applied Section 14A and made a disallowance of Rs.17,25,234/- for interest expenditure under Rule 8D(ii) and Rs.3,68,550/- for administrative expenses under Rule 8D(iii).

Issue 2: Applicability of Section 14A when no exempt income is claimed
The assessee argued that since it did not claim any exempt income, Section 14A should not apply. However, the AO held that the provisions of Section 14A were applicable irrespective of whether the exempt income was claimed for tax or not.

Issue 3: Nexus between investments and surplus funds
The CIT(A) observed that the assessee did not demonstrate a clear nexus between the investments and surplus funds. The assessee made general statements about using free reserves and surplus funds without providing specific evidence. The CIT(A) thus confirmed the AO's disallowance, stating that the same interest-bearing funds were used for both investments and business operations.

Issue 4: Investments in private limited companies and cooperative banks
The assessee contended that its investments were in private limited companies and a cooperative bank, which should not attract Section 14A disallowance. However, the CIT(A) did not accept this argument, maintaining the disallowance under Section 14A.

Issue 5: Consideration of various decisions by the ITAT
The assessee cited the decision of the Hon'ble Bombay High Court in 'CIT v. Reliance Utilities & Power Ltd.' to argue that if sufficient interest-free funds were available, it should be presumed that investments were made from those funds. The Tribunal noted that this presumption holds only if interest-free funds were available at the time of investment. The lower authorities had not examined the assessee's claim adequately, rejecting it as too general.

Issue 6: Disallowance under Rule 8D(2)(iii) for administrative expenses
The Tribunal found no reason to interfere with the disallowance of Rs.3,68,550/- under Rule 8D(iii) for administrative expenses, as the assessee itself had offered this disallowance being 0.5% of the average investment.

Conclusion:
After reviewing the submissions and the balance sheets, the Tribunal was satisfied that the major investments were made from interest-free funds available with the assessee, not from interest-bearing funds. Therefore, the disallowance of interest expenditure under Rule 8D(ii) was deleted. However, the disallowance of Rs.3,68,550/- under Rule 8D(iii) for administrative expenses was confirmed.

Result:
The appeal was partly allowed, deleting the disallowance under Rule 8D(ii) but confirming the disallowance under Rule 8D(iii).

Order Pronounced:
The order was pronounced in the open court on 21/3/2014.