2012 (12) TMI 1209 - AT - Income Tax

Summary

Issues Involved:
The appeal by Revenue against the order of ld.CIT(Appells)-I, Vadodara regarding the disallowance of interest expenses u/s.14A for A.Y.2002-03.

Issue 1: Disallowance of Interest Expenses u/s.14A:
The Revenue contended that the ld.CIT(A) erred in deleting the disallowance of interest expenses amounting to Rs. 22,05,095 u/s.14A, as the borrowed funds were diverted for non-business purposes of investments. The Assessing Officer noted that the assessee had taken unsecured loans and debited interest expenses of Rs. 43,24,955, with investments in shares and securities amounting to Rs. 6.32 crores. The AO calculated that 49% of the borrowed funds were utilized for investments in shares, resulting in the disallowance of Rs. 22,05,095 u/s.14A. The Revenue argued that the onus was on the assessee to prove that all borrowed funds were used for business purposes, citing a landmark decision. However, the first appellate authority found that there were sufficient interest-free funds available with the company, including share capital and reserves, and dismissed the disallowance.

Issue 2: Judicial Analysis and Decision:
The Learned CIT(A) conducted a detailed analysis of the case, noting that the assessee had disallowed interest based on the direct nexus between interest payment and earning exempt income. It was observed that the assessee utilized both non-interest bearing funds and borrowed funds for investments in shares. The CIT(A) examined the source of investments and found that most investments were made from interest-free funds, except for the amount voluntarily disallowed by the assessee. Citing a decision of the Bombay High Court, the disallowance u/s.14A was deemed unjustified. The ITAT commended the CIT(A) for the thorough examination of the investment nexus and upheld the decision based on established case law and previous rulings in the assessee's case for other assessment years.

Conclusion:
After considering the facts and circumstances, the ITAT found no merit in the Revenue's grounds and dismissed the appeal. The decision of the CIT(A) to delete the disallowance of interest expenses u/s.14A was upheld based on the availability of interest-free funds and the established nexus between investments and funding sources.