2015 (2) TMI 481 - AT - Income Tax

Disallowance u/s 14A - whether amount invested in securities were not out of borrowed funds - Held that - In view of the fact that specific term loans were obtained for specific assets and investment in net working capital was much more than working capital limit, it can be said that no borrowed funds were used for making investment and therefore disallowance of interest u/s 14A was not justified. The incurring of short term loss from mutual funds and earning from long term capital gains on shares proves that assessee was continuously engaged in investment activities both short term and long term which cannot be done without proper human resources and proper infrastructure. Therefore, we are of the considered opinion that the Assessing Officer had rightly disallowed 0.5% of expenditure as disallowance u/s 14A of the Act. In view of the above, we restrict the disallowance to the extent of ₹ 5,64,016/- and delete the addition of ₹ 18,39,156/- on account of disallowance of interest u/s 14A of the Act. - Decided partly in favour of assessee

Summary

Issues:
1. Disallowance u/s 14A of the Income Tax Act, 1961
2. Justification of disallowance based on borrowed funds for investments

Analysis:

Issue 1: Disallowance u/s 14A of the Income Tax Act, 1961
The appeal was filed against the order of the Ld CIT(A) confirming the disallowance u/s 14A of the Income Tax Act, 1961 amounting to Rs. 24,03,172. The Assessing Officer noted that the company had significant investments and earned exempt income through dividends and long-term capital gains. The AR of the assessee argued that only 10% of bank charges were related to earning exempt income and no interest-bearing funds were used for investments. However, the Assessing Officer calculated the disallowance u/s 14A based on various judgments of Courts, resulting in a disallowance of Rs. 24,03,172.

Issue 2: Justification of disallowance based on borrowed funds for investments
The assessee contended that no borrowed funds were used for making investments, as specific term loans were obtained for specific assets, and the working capital was fully invested in net current assets. The Tribunal noted that the net investment in working capital exceeded the working capital limit, indicating that no borrowed funds were utilized for investments. However, considering the significant short-term capital loss incurred on mutual funds, it was evident that the assessee was actively engaged in investment activities. The Tribunal concluded that the Assessing Officer rightly disallowed 0.5% of expenditure as per Rule 8D. Consequently, the disallowance was restricted to Rs. 5,64,016, and the addition of Rs. 18,39,156 on account of interest disallowance u/s 14A was deleted.

In conclusion, the appeal filed by the assessee was partly allowed, and the disallowance u/s 14A was restricted based on the analysis of borrowed funds and investment activities.