2016 (8) TMI 56 - AT - Income Tax

Addition u/s 14A - Held that - As during the year under consideration, assessee has not earned any exempt income in order to invoke the provisions of section 14A of the Act. Thus we find no reason to uphold the impugned disallowance made by the income tax authorities by invoking section 14A of the Act - Decided in favour of assessee Addition invoking the provisions of section 36(1)(iii) - Held that - Following the judgment of Hon ble Bombay High Court in the case Reliance Utilities And Power Limited (2009 (1) TMI 4 - BOMBAY HIGH COURT ), it can be presumed that no borrowed funds were used to make such investments. As per Hon ble Bombay High Court, the principle is that, if there are funds available both interest free and interest bearing, then a presumption can be drawn that investments are made out of interest free funds, so long as such interest free funds are sufficient to meet the investments. In our considered opinion, having regard to the fact position brought out by the CIT(A), the proposition laid down by the Hon ble Bombay High Court in the case of Reliance Utilities And Power Limited(supra) is fully attracted in the present case. Such fact-situation has been enumerated by the CIT(A) in Para 3.4 of his order, which depicts the summarized fund flow position of the assessee, and the same has not been controverted by the Revenue before us, rather the same is also borne out of the material placed in the Paper Book filed before us. Therefore, on this count itself, we find no reason to interfere with the ultimate conclusion of the CIT(A) in deleting the addition - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under section 14A of the Income Tax Act, 1961
2. Addition made under section 36(1)(iii) of the Income Tax Act

Issue 1: Disallowance under section 14A of the Income Tax Act, 1961:

The case involved cross-appeals by the assessee and Revenue against the order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961. The primary issue was the disallowance of &8377; 33,93,829 under section 14A of the Act. The Assessing Officer invoked Rule 8D of the Income Tax Rules, 1962 to calculate the disallowance due to investments yielding exempt income. The CIT(A) upheld the disallowance citing the mandatory application of Rule 8D from assessment year 2008-09. However, the ITAT ruled in favor of the assessee, noting the absence of any exempt income during the year as per judgments of the Bombay High Court and Delhi High Court. Consequently, the disallowance was directed to be deleted, and the appeal of the assessee was allowed.

Issue 2: Addition made under section 36(1)(iii) of the Income Tax Act:

The Revenue's appeal contested the deletion of an addition of &8377; 53,07,260 made under section 36(1)(iii) by the CIT(A). The Assessing Officer disallowed a portion of interest expenditure due to investments made out of borrowed funds. The CIT(A accepted the assessee's submissions, including the business purpose of investments and the sufficiency of non-interest bearing funds. Relying on the judgment of the Bombay High Court, the CIT(A concluded that no borrowed funds were used for investments. The ITAT affirmed the CIT(A)'s decision, emphasizing the fund flow statement and the presumption of investments made from interest-free funds when sufficient. As a result, the addition was deleted, and the Revenue's appeal was dismissed.

In conclusion, the ITAT ruled in favor of the assessee regarding the disallowance under section 14A and upheld the CIT(A)'s decision regarding the addition made under section 36(1)(iii). The judgments of the Bombay High Court and the Delhi High Court played a crucial role in determining the outcomes of the appeals.