2017 (9) TMI 531 - HC - Income Tax

Disallowance under section 14A - computing book profit of a company under section 115JB - Held that - If there are interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee has raised a loan it can be presumed that the investments were from interest free funds available, and, accordingly, no disallowance under section 14A in respect of interest payment can be made in such a situation. S A Builders Limited Vs. Commissioner of Income Tax (Appeals) 2006 (12) TMI 82 - SUPREME COURT MAT - No disallowance under section 14A of the Act can be projected while computing a company s booked profit under section 115JB of the Act.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961.
2. Disallowance under section 14A while computing book profit under section 115JB of the Act.

Issue 1: Disallowance under section 14A of the Income Tax Act, 1961:
The case involved an appeal by the Revenue against the decision of the Tribunal to delete a disallowance of ?79.30 lakhs made under section 14A of the Income Tax Act. The Assessing Officer had disallowed the amount based on the belief that some borrowed funds were used to make investments earning exempt income. However, the Tribunal held that section 14A can only be applied if the Assessing Officer is not satisfied with the claim of the assessee regarding expenditure. The Tribunal referenced previous judgments to support its decision, emphasizing that if interest-free funds of the assessee exceed investments yielding tax-exempt income, no disallowance under section 14A should be made. The High Court upheld the Tribunal's decision, stating that disallowance was not permissible in this case.

Issue 2: Disallowance under section 14A while computing book profit under section 115JB of the Act:
The second question raised was whether disallowance under section 14A could be made while computing a company's book profit under section 115JB of the Act. The Tribunal's earlier judgment in a different case suggested that such disallowance could be adopted while arriving at book profits. However, the Tribunal in the present case held that no disallowance under section 14A should be made while computing book profit under section 115JB. The High Court found this issue to be academic due to its conclusions on the first question. The Court did not elaborate further on this aspect, given the dismissal of the Tax Appeal.

In conclusion, the High Court dismissed the Tax Appeal, upholding the Tribunal's decision to delete the disallowance under section 14A of the Income Tax Act. The Court also noted that the issue regarding disallowance under section 14A while computing book profit under section 115JB was not elaborated on further due to the primary conclusion reached on the first issue.