2017 (3) TMI 1480 - AT - Income Tax

Section 14A Disallowance - investment income - interest paid by the Assessee Company on borrowed funds - Held that - The Hon ble Bombay High Court in CIT Vs. M/s. Delite Enterprises (2009 (2) TMI 498 - BOMBAY HIGH COURT) have held that where there is no income arising to the assessee on its investment, then no disallowance is to be made under section 14A of the Act i.e. interest expenses related to such tax profits are not to be disallowed under section 14A of the Act. Accordingly, we hold that in so far as the interest expenditure being attributable to such investments, against which the assessee had not received any exempt income, no disallowance of interest expenditure could be made under section 14A of the Act. Accordingly, we allow the claim of assessee in respect of interest expenditure of ₹ 21,52,504/- and allow the ground of appeal No.1 raised by the assessee. Balance interest expenditure - Held that - Admittedly, the assessee had borrowed the funds but on the other hand, the assessee has sufficient interest free funds available with it, which is apparent from the copy of balance sheet filed by the assessee. The Hon ble Bombay High Court in CIT Vs. HDFC Bank Ltd. (2014 (8) TMI 119 - BOMBAY HIGH COURT ) have clearly laid down that in such cases, where the assessee has sufficient capital available with it, no disallowance was to be made out of interest expenditure under section 14A of the Act. Applying the ratio laid down by the Hon ble Bombay High Court, we hold that no disallowance is to be made out of balance interest expenditure of ₹ 5,80,523/-. The ground of appeal No.2 raised by the assessee is thus, allowed. Disallowance of part of administrative expenses under section 14A - Held that - Applying th e ratio laid down by the Hon ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT), we direct the Assessing Officer in restricting the disallowance under section 14A of the Act on account of administrative expenses to ₹ 50,000 /-. Accordingly, we partially allow the claim of assessee and ground of appeal No.3 raised by the assessee is thus, partly allowed. The grounds of appeal raised by the assessee are thus, partly allowed.

Summary

Issues Involved:
1. Disallowance of interest under Section 14A of the Income-tax Act, 1961.
2. Disallowance of interest paid on funds borrowed for business purposes under Section 14A.
3. Restriction of disallowance of administrative and common expenses under Section 14A.

Detailed Analysis:

1. Disallowance of Interest under Section 14A:
The primary issue is the disallowance of ?21,52,504/- as interest under Section 14A of the Income-tax Act. The assessee contended that the borrowed funds were used for investments that yielded taxable short-term capital gains and not tax-exempt income. The CIT(A) upheld the disallowance, referencing CBDT Circular No.5 of 2014, which mandates disallowance under Section 14A even if no exempt income is earned. However, the Tribunal referenced the Hon'ble Bombay High Court's decision in CIT Vs. M/s. Delite Enterprises, which held that no disallowance under Section 14A is warranted if no exempt income is earned. Consequently, the Tribunal allowed the assessee's claim, reversing the disallowance of ?21,52,504/-.

2. Disallowance of Interest Paid on Funds Borrowed for Business Purposes:
The second issue involved the disallowance of ?5,80,523/- as interest on borrowed funds for business purposes. The assessee argued that it had sufficient interest-free funds (?51 crores as working capital) to cover the investments. The Tribunal applied the ratio from CIT Vs. HDFC Bank Ltd., which states that no disallowance should be made if the assessee has sufficient interest-free funds. Thus, the Tribunal allowed the assessee's claim and reversed the disallowance of ?5,80,523/-.

3. Restriction of Disallowance of Administrative and Common Expenses:
The third issue concerned the restriction of disallowance of administrative and common expenses to 50% by the CIT(A), which the assessee argued was excessive. The Tribunal referred to the Hon'ble Bombay High Court's decision in Godrej & Boyce Manufacturing Co. Ltd., which suggested a reasonable disallowance for administrative expenses. The Tribunal directed the Assessing Officer to restrict the disallowance to ?50,000/-, thereby partially allowing the assessee's claim.

Conclusion:
The Tribunal's judgment addressed the three primary issues related to disallowance under Section 14A of the Income-tax Act. It allowed the assessee's appeal on the disallowance of interest (?21,52,504/-) and interest paid on borrowed funds (?5,80,523/-), citing relevant High Court rulings. The Tribunal also partially allowed the appeal regarding the disallowance of administrative expenses, reducing it to ?50,000/-. The appeal was thus partly allowed, providing significant relief to the assessee.