2015 (11) TMI 399 - HC - Income Tax

Disallowance made under section 14A - interest bearing borrowed funds were utilised by the assessee entirely for the purpose of its business and investment in tax-free bonds having been made by the assessee out of its own funds as submittted by revenue - ITAT allowed assessee claim - Held that - The Commissioner of Income-tax (Appeals) and the Tribunal both held that there was no warrant for such an estimation. The Commissioner of Income-tax (Appeals) held that no interest expenditure can be allocated to the earning of the tax-free income received by the assessee on tax-free bonds. The Tribunal held that the Commissioner of Income-tax (Appeals) rightly interfered with the order of the Assessing Officer. The decision of the Commissioner of Income-tax (Appeals) was upheld by the Tribunal and the view taken by the Commissioner of Income-tax (Appeals) as also the Tribunal is inconsonance with the law laid down by this court in the case of CIT v. Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - HIGH COURT BOMBAY . The view taken also has been in consonance with the law laid down by this court in the case of Godrej and Boyce Mfg. Co. Ltd. v. Deputy CIT reported in 2010 (8) TMI 77 - BOMBAY HIGH COURT 328 ITR 81 (Bom). In these circumstances, we find that merely because that there is a common pool of funds, a presumption that the investment yielding tax-free returns is made by the assessee out of its own funds cannot be raised. Such a view of the Tribunal, therefore, does not raise any substantial question of law. - Decided against revenue.

Summary

Issues:
Challenge to order by Income-tax Appellate Tribunal for assessment year 2003-04 regarding disallowance under section 14A for interest bearing borrowed funds utilized for tax-free bonds.

Analysis:
The appeal by the Revenue challenges the order passed by the Income-tax Appellate Tribunal for the assessment year 2003-04. The principal ground of grievance for the Revenue was the relief obtained by the assessee from the first appellate authority regarding the disallowance made under section 14A. The Revenue argued that the assessee utilized interest bearing borrowed funds entirely for business purposes and investments in tax-free bonds were made from its own funds. The Assessing Officer, however, held that without a separate cash flow statement, it was not possible to establish that the investment in tax-free bonds was solely from the assessee's own funds. The Assessing Officer estimated the disallowance based on the proportion of borrowed funds to total funds. Both the Commissioner of Income-tax (Appeals) and the Tribunal held that such estimation was unwarranted. The Commissioner of Income-tax (Appeals) ruled that no interest expenditure could be allocated to tax-free income from bonds, a decision upheld by the Tribunal. The Tribunal's view was consistent with legal precedents set by the Bombay High Court in previous cases.

The High Court found that the presumption of investment in tax-free returns being made from the assessee's own funds cannot be raised solely based on a common pool of funds. The Tribunal's decision did not raise any substantial question of law in this regard. Despite the appellant's request to remit the matter back to the Assessing Officer for verification and scrutiny, the High Court found no basis to grant the request. The Additional Solicitor General highlighted the lack of material regarding interest-free funds and reserves, emphasizing the need for sufficient proof before raising any presumption. As no such inquiry was deemed necessary and no materials were presented, the High Court declined the request for remittance.

Consequently, the High Court determined that no substantial questions of law required adjudication, as the issues were already settled in favor of the assessee and against the Revenue. The appeal was dismissed with no costs incurred.