2016 (9) TMI 1594 - AT - Income Tax

Addition u/s 14A - Disallowance of finance expenses and other expenses on investment in shares out of business income - as argued the appellant had surplus interest free funds available for investment in shares and hence no finance expenses and other expenses is attributable towards investment in shares - A.O. rejected the contentions of the assessee as the assessee is not able to establish a direct link with the interest free funds or own funds available with the assessee with the investments made and therefore the usage of interest bearing borrowed fund in making investment in shares, income from which does not form part of the total income, cannot be ruled out - HELD THAT - As gone through the orders of authorities below. There is no finding of fact recorded in the orders of authorities below that assessee has its own surplus funds available in this year which are sufficient to make the investment - an unsigned chart has been submitted by the ld. Counsel for the assessee before the Tribunal whereby it is submitted that there is share capital of an amount of ₹ 60,48,00,000/- and reserves and surplus amounting to ₹ 2,09,36,78,634/-as at 31-03-2009 against which investments in shares stood at ₹ 1,28,67,27,471/- as at 31-03-2009. In the same unsigned chart it is also reflected an amount of ₹ 34,92,98,780/- under the head profits earned during the year as per P L A/c, while dividend received stood at ₹ 8,47,63,455/- . - no audited financial statements are submitted by the assessee . We , however, agree with the proposition and contentions of the assessee that presumption will apply that the assessee has made investment in shares out of its own surplus funds unless contrary is brought on record keeping in view the decision of Reliance Utilities and Power Ltd., 2009 (1) TMI 4 - BOMBAY HIGH COURT and HDFC bank Limited 2016 (3) TMI 755 - BOMBAY HIGH COURT Hence keeping in view the factual matrix of the case as set out above, the disallowance of interest made by the A.O. under Section 14A of the Act read with Rule 8D(2)(ii) of Income Tax Rules, 1962 is not sustainable and ordered to be deleted subject to limited verification by the AO about the correctness of figures of net owned funds which includes share capital reserves and surpluses- accumulated losses , as well as investments in shares etc made by the assessee which are capable of yielding exempt income as contended by the assessee before us through unsigned chart. Disallowance made u/s 14A read with Rule 8D(2)(iii) on disallowance @ 0.5% of average value of investment - matter with respect to disallowance of administrative and indirect expenses u/s 14A of the Act read with Rule 8D(2)(iii) of Income Tax Rules, 1962 needed to be set aside and restored to the file of the A.O. for de-novo computation of the disallowance of administrative and indirect expenses having regard to the accounts of the assessee as contemplated u/s 14A(2) of Income Tax Rules, 1962.

Summary

Issues Involved:
Disallowance of finance expenses and other expenses on investment in shares

Analysis:
1. The appeal was filed by the assessee company against the appellate order dated 6th November, 2012 passed by the Commissioner of Income Tax (Appeals) for the assessment year 2009-10. The dispute revolved around the disallowance of finance expenses and other expenses of a significant amount made by the Assessing Officer on the investment in shares out of business income. The assessee contended that it had surplus interest-free funds available for investment in shares, thus challenging the disallowance.

2. The Assessing Officer observed that the assessee had invested a substantial amount in shares of various companies and received dividends claimed as exempt income. The AO questioned the interest paid on borrowed funds used for share investments, invoking Section 14A of the Income Tax Act. The AO held that the borrowed funds were not used for the business purpose of the assessee, leading to the disallowance of interest under section 36(1)(iii) of the Act. The AO applied Rule 8D of the Income Tax Rules, 1962, for computing the disallowance, relying on relevant court judgments.

3. The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that the disallowance under Section 14A read with Rule 8D was justified after verifying the facts submitted by the assessee. Subsequently, the assessee appealed to the Tribunal challenging the CIT(A)'s decision.

4. The Tribunal noted that the issue was previously decided in favor of the assessee for the assessment year 2008-09, emphasizing the availability of the assessee's own funds for share investments. The Tribunal highlighted that disallowances should not be made mechanically and should not exceed the expenditure claimed by the assessee. The Tribunal considered the financial figures presented by the assessee to support its claim of sufficient funds for share investments.

5. After considering the contentions of both parties and the material on record, the Tribunal observed that there was no explicit finding on the availability of the assessee's surplus funds in the orders below. However, relying on legal precedents, the Tribunal held that the presumption would apply that the assessee made investments in shares out of its own surplus funds unless proven otherwise. Consequently, the disallowance of interest under Section 14A read with Rule 8D(2)(ii) was deemed unsustainable and ordered to be deleted subject to limited verification by the AO.

6. Regarding the disallowance of administrative and indirect expenses under Section 14A read with Rule 8D(2)(iii), the Tribunal found the AO's decision lacking consideration of the assessee's accounts. Therefore, this matter was set aside and restored to the AO for a fresh computation of the disallowance, emphasizing the principles of natural justice and providing the assessee with an opportunity to present relevant evidence.

7. In conclusion, the Tribunal partly allowed the appeal for statistical purposes, directing the AO to recompute the disallowance of administrative and indirect expenses in accordance with the law and principles of natural justice.