2015 (4) TMI 628 - HC - Income Tax

Addition u/s 36(I)(iii) - whether introduction of provision of sec. 14A with retrospective effect, ITAT was justified in law and on the facts to delete addition coming under sec. 36(I)(iii) - Held that - How does the interest paid or incurred by the assessee for earning exempt income become an expenditure allowable under section 36 of the Income Tax Act has not been explained by the learned Tribunal nor has Mr. Bagaria, learned Advocate for the assessee tried to make any improvement thereupon. Therefore, the finding given by the learned Tribunal is palpably wrong. Admittedly, money was paid from the cash credit account. The position would have been different if the money had been paid from a current account or a savings account. Money was admittedly paid from the cash credit account and admittedly interest was also paid. Therefore, it was the obligation of the assessee to offer one to one explanation to establish that the money borrowed from United Bank of India was not spent for the purpose of purchasing the shares. Since the assessee did not discharge his obligation, the Assessing Officer had refused to allow the deduction. Without applying mind, the learned Tribunal upheld the contention of the assessee. We, therefore, propose to remand the matter to the Assessing Officer. - Decided in favour of the revenue.

Summary

Issues:
1. Interpretation of section 36(I)(iii) of the Income Tax Act, 1961.
2. Application of section 14A of the Income Tax Act, 1961.
3. Disallowance of interest paid by the assessee for earning exempt income.
4. Burden of proof on the assessee regarding funds utilized for investment.
5. Comparison with a previous judgment regarding disallowances under section 14A.

Analysis:
1. The appeal involved a question of law regarding the deletion of an addition under section 36(I)(iii) of the Income Tax Act, 1961, due to the introduction of section 14A with retrospective effect. The Tribunal had deleted the addition based on the assessee's mixed bank account and lack of concrete evidence of borrowed funds being utilized for interest-free investments. The High Court found the Tribunal's decision wrong as it failed to explain how interest paid for earning exempt income could be an allowable expenditure under section 36.

2. The Tribunal's decision was based on the lack of a direct nexus between borrowed funds and interest-free investments. However, the High Court emphasized that the assessee failed to provide a clear explanation regarding the utilization of funds borrowed from the bank for purchasing shares. The Court noted that the money was paid from a cash credit account, and interest was also paid from the same account, leading to the obligation of the assessee to establish that borrowed funds were not used for investments.

3. The Court highlighted the importance of the assessee discharging the burden of proof regarding the source of funds utilized for investments. Since the assessee did not meet this obligation, the Assessing Officer rightly refused the deduction. The High Court proposed to remand the matter to the Assessing Officer for further examination, emphasizing the need for a one-to-one correlation between funds available and funds deployed for investments.

4. Reference was made to a previous judgment where the Commissioner of Income Tax directed the Assessing Officer to make disallowances under section 14A, which was upheld by the High Court. The Court clarified that this previous judgment supported the current decision to remand the matter for proper assessment. Therefore, the High Court answered the question in the negative, favoring the revenue, and directed the Assessing Officer to expedite the examination due to the age of the case.