2015 (7) TMI 829 - AT - Income Tax

Disallowance of interest expenditure u/s 14A - Held that - When assessee was having enough non-interest bearing surplus fund to make the investment and department has failed to establish any nexus between the borrowed funds and investment, presumption would be that assessee has made investment utilizing its own funds. The decisions relied upon by ld. DR would be of no help to department as they are not on the proposition, whether interest expenditure will be disallowable where assessee proves that investments were out of non-interest bearing surplus fund. In the aforesaid view of the matter, we do not find any reason to sustain the disallowance of interest expenditure made by AO under rule 8D(2)(ii) read with section 14A of the Act. However, as far as disallowance made under rule 8D(2)(iii) is concerned, we are of the view that such disallowance has to be sustained in view of specific provision contained under sub-section (3) of section 14A, which provides that even in a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of total income, still disallowance can be made by AO. In view of the aforesaid, we direct AO to compute disallowance @ 0.5% of the total average investment in terms with rule 8D(2)(iii) of IT Rules. - Decided partly in favour of assessee.

Summary

Issues: Disallowance of interest expenditure u/s 14A of the Act

Detailed Analysis:

1. Background and Facts:
The appeals by the assessee were against separate orders of the ld. CIT(A) for the AYs 2008-09 & 2009-10 concerning the disallowance of interest expenditure u/s 14A of the Act. The primary contention was whether the interest expenditure was correctly disallowed as per the provisions of section 14A.

2. Contentions of the Assessee:
The assessee argued that the investments were made out of surplus funds and not borrowed funds. They contended that there was no nexus between the borrowed funds and the investments made. The assessee relied on judicial precedents to support their argument.

3. Decision of the CIT(A):
The ld. CIT(A) confirmed the disallowance made by the AO under section 14A read with Rule 8D. However, the CIT(A) directed the AO to exclude a specific amount while computing the disallowance under section 14A.

4. Arguments of the Department:
The Department argued that the conditions of section 14A were satisfied as the assessee made investments giving rise to exempt income and also incurred interest expenditure. They emphasized the need to establish a link between investments and the availability of surplus funds.

5. Judgment by the ITAT:
The ITAT analyzed the facts and concluded that the assessee had substantial surplus funds available for investments. They highlighted that unless a link was established between borrowed funds and investments, no disallowance under section 14A could be made for interest expenditure. The ITAT referred to relevant judicial decisions to support their reasoning.

6. Final Verdict:
The ITAT partly allowed both appeals of the assessee. They directed the AO to compute the disallowance at 0.5% of the total average investment under Rule 8D(2)(iii) for both AYs 2008-09 and 2009-10. The judgment was pronounced on 22nd July 2015 by the ITAT Hyderabad.

This detailed analysis provides a comprehensive overview of the legal judgment concerning the disallowance of interest expenditure under section 14A of the Income Tax Act.