2015 (2) TMI 672 - HC - Income Tax

Disallowance u/s 14A read with Rule 8D - interest on loans, on investments earning tax free income in the form of dividend - ITAT confirming the order of CIT(A) deleting the disallowance - Held that - Section 14A of the Act requires the Assessing Officer to record satisfaction that interest bearing funds have been used to earn tax free income. The satisfaction to be recorded must be based upon credible and relevant evidence. The onus, therefore, to prove that interest bearing funds were used, lies squarely on the shoulders of the revenue. Assessing Officer, however, cannot, by recording general observations, particularly where the assessee has denied using interest bearing funds, proceed to infer that interest bearing income must has been used to earn exempted income. Section 14A of the Act, being in the nature of an exception, has to be construed strictly and only where the Assessing Officer records satisfaction, on the basis of clear and cogent material, shall an order be passed under Section 14A of the Act, disallowing such a claim. As there is no tangible material on record that could have enabled the Assessing Officer to record satisfaction in terms of Section 14A of the Act, findings recorded by the CIT(A) and the ITAT that the Assessing Officer has failed to discharge this onus are neither perverse nor arbitrary and, therefore, do not call for interference. - Decided in favour of assessee.

Summary

Issues:
Challenge to order by Revenue under Section 14A read with Rule 8D disallowing certain exemptions claimed by assessee.

Analysis:
The judgment involves a challenge by the Revenue against an order passed by the Income Tax Appellate Tribunal (ITAT) related to the disallowance of &8377; 2,37,67,894/- under Section 14A of the Income Tax Act, 1961. The dispute arose from the Assessing Officer disallowing certain exemptions claimed by the assessee, alleging that interest bearing funds were used to earn tax-free dividends. The CIT(A) and the ITAT both ruled in favor of the assessee, stating that the Revenue failed to prove the usage of interest bearing funds. The Revenue contended that the ITAT erred in confirming the deletion made by the CIT(A) and that the burden of proof lay on the assessee. However, the ITAT upheld the CIT(A)'s decision based on the lack of evidence provided by the Revenue to establish the usage of interest bearing funds.

The key issue revolved around Section 14A of the Act, which empowers the Assessing Officer to disallow exempted income if interest bearing funds were utilized by the assessee. The judgment referred to the scope of Section 14A as discussed in previous cases, emphasizing that disallowance is only applicable if investments were made using borrowed funds. The judgment highlighted that the burden of proof lies with the Revenue to demonstrate the use of interest bearing funds. The judgment emphasized the strict interpretation of Section 14A, requiring clear and cogent material for disallowance, which was lacking in this case. The judgment also cited precedents to support the assessee's position, emphasizing the need for tangible evidence to disallow claims under Section 14A.

Ultimately, the judgment concluded that the findings of the CIT(A) and the ITAT were valid as the Revenue failed to provide sufficient evidence to prove the usage of interest bearing funds. The judgment also referenced the precedent in CIT v. Winsome Textile Industries Ltd. to support the decision in favor of the assessee. Consequently, the questions of law framed by the Revenue were answered against them, and the appeal was dismissed accordingly.