2018 (9) TMI 1854 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D(2)(ii) - disallowance made under Rule 8D(2)(ii) in respect of interest expenditure - assessee is in second appeal before the Tribunal - HELD THAT - Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities and Power Ltd. reported as 2009 (1) TMI 4 - BOMBAY HIGH COURT has held that where both interest free funds and interest bearing funds are available and the interest free funds are more than the investment made, the presumption is that the investment is made out of interest free funds available with the assessee. The said decision was rendered by the Hon'ble Jurisdictional High Court in the context of Section 36(1)(iii). The Hon'ble High Court, thereafter, applied the same principle while interpreting the provisions of section 14A in the case of CIT Vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT .The Hon'ble High Court observed that where investment is made in tax free securities by the assessee, it would be presumed to have been made from own funds in case they are in excess of investment made. Thus disallowance in respect of interest expenditure made under Rule 8D(2)(ii) is deleted. The impugned order is modified, accordingly, the ground raised in appeal by the assessee is allowed.

Summary

Issues: Disallowance of expenses under section 14A of the Income Tax Act, 1961

Analysis:
The appeal was against the order of Commissioner of Income Tax (Appeals) for the assessment year 2008-09. The only ground raised was the disallowance of expenses under section 14A of the Income Tax Act, 1961. The Assessing Officer disallowed a specific amount under Rule 8D(2)(ii) of the Income Tax Rules, 1962. The appellant, a company engaged in the business of manufacturing and selling fertilizers, argued that the investment was made from interest-free funds. However, the Assessing Officer rejected this claim, leading to an appeal. The appellant had interest-free funds exceeding the investment amount, as per the Balance Sheet. The argument was supported by citing a relevant decision of the High Court. The Department defended the Commissioner's order. The Tribunal considered the facts and the legal precedent cited. It noted that the High Court's decision established a presumption that investments made from interest-free funds are not subject to disallowance. Therefore, the disallowance of interest expenditure under Rule 8D(2)(ii) was deleted based on the High Court's ruling. Consequently, the appeal of the assessee was allowed, and the order was modified accordingly.