2018 (4) TMI 1970 - AT - Income Tax

Disallowance of interest u/s 14A - expenditure incurred on earning exempt income - sufficiency of own funds - CIT(A) deleted the addition - HELD THAT - As decided by CIT(A) what s.14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax-free income. Hence in the absence of any tax-free income, the corresponding expenditure could not be worked out for disallowance. There are ample interest free funds available for investment in shares. A table showing year wise accruals are testimony to the same.The intention of investment was not to earn dividend. There has been no dividend during the period of holding is a testimony to that proposition. Also the objective of investment was to sit in management to influence decision making of that company and fetch construction contract and also to gain capital appreciation in value of shares by selling the same when execution risk is overcome. Therefore even presuming that the same was out of borrowed funds, it is clearly manifested that there has been no dividend but the income from acquiring contract was offered to tax. Also capital gains on sale of shares were offered to tax. Therefore in the peculiar facts and circumstances, it is demonstrated by the assessee by actually offering the income to taxation then it cannot be said that shares were intended to earn income which is tax exempt.If the investment has a potential to earn non exempt income 14A cannot be invoked. The visit to 14A (2) or (3) is permissible only when the claim of the assessee has been held to be incorrect by showing cogent reason. Satisfaction or dissatisfaction is to be supported by valid reasons From the order of the Ld. CIT(A), it is evident that the Ld. CIT(A) has examined the factual aspects of the case. The Revenue has not rebutted the finding by placing any contrary material on record. Therefore, we do not see any reason to interfere with the orders of the Ld. CIT(A). Decided against revenue.

Summary

Issues Involved:
1. Disallowance of interest under Section 14A of the Income Tax Act.
2. Application of Rule 8D of the Income Tax Rules, 1962.
3. Use of borrowed funds for investment.

Issue-wise Detailed Analysis:

1. Disallowance of Interest under Section 14A of the Income Tax Act:

The Revenue's primary contention was that the CIT(A) erred in deleting the addition of ?1,00,97,137/- made by the AO on account of disallowance of interest under Section 14A. The AO had invoked Section 14A and applied Rule 8D to disallow the interest. The assessee argued that the facts were identical to previous assessment years 2008-09 and 2009-10, where the Tribunal had restored the matter to the AO, who concluded that the assessee did not use borrowed funds for investments. The CIT(A) had found that the assessee had not used borrowed funds for investments and directed the deletion of the addition.

2. Application of Rule 8D of the Income Tax Rules, 1962:

The AO applied Rule 8D to compute the disallowance under Section 14A. However, the CIT(A) noted that the assessee had sufficient interest-free funds to make the investments, and thus, Rule 8D was not applicable. The CIT(A) relied on various judicial precedents, including the Bombay High Court's decision in Reliance Utilities & Power Ltd., which held that if there are sufficient interest-free funds available, it can be presumed that investments were made from these funds.

3. Use of Borrowed Funds for Investment:

The CIT(A) observed that the assessee had ample interest-free funds available, as evidenced by the balance sheet showing equity and reserves far exceeding the investments. The CIT(A) also noted that the secured loans were used for business purposes and not for investments. The assessee's intention behind the investments was not to earn tax-exempt income but to gain management control and capital appreciation, which was offered to tax. The CIT(A) concluded that there was no justification to invoke Section 14A for disallowance of interest.

Conclusion:

The Tribunal upheld the CIT(A)'s findings, noting that the Revenue did not provide any contrary material to rebut the CIT(A)'s factual findings. The Tribunal found no reason to interfere with the CIT(A)'s orders and dismissed the Revenue's appeals. The order was pronounced in the open court on 25.04.2018.