2019 (7) TMI 354 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D(2)(ii) - sufficiency of own funds - whether own interest free funds are sufficient to cover the investments? - HELD THAT - A perusal of Balance sheet shows that the assessee is having own interest free funds comprising of share capital, reserves and surplus aggregating to ₹ 7,54,94,323/-, as against the investments of ₹ 4,26,14,226/-. Since, the assessee s own interest free funds are sufficient to cover the investments it is presumed that entire investments are made from non-interest bearing funds. The Hon ble Jurisdictional High Court in the case of Commissioner of Income Tax Vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT has held that where the assessee is having both interest free funds and interest bearing funds, the presumption is that the investments are made from interest free funds. Accordingly, the disallowance u/s. 14A r.w. Rule 8D(2)(ii) in respect of interest expenditure is deleted. - Decided in favour of assessee.

Summary

Issues:
Disallowance made under section 14A r.w. Rule 8D(2)(ii) of the Act.

Analysis:
The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-4, Pune for the assessment year 2012-13. The sole issue raised in the appeal was regarding the disallowance made under section 14A r.w. Rule 8D(2)(ii) of the Act. The assessee, a private limited company engaged in the manufacture and sale of fertilizers, had declared a total income of ?91,36,633 for the relevant assessment year. The Assessing Officer disallowed ?13,52,528 under section 14A r.w. Rule 8D, concerning the exempt dividend income earned by the assessee. The assessee contended that there was no utilization of borrowed funds for investments, as it possessed sufficient own interest-free funds, making any disallowance of interest expenditure unjustified.

During the proceedings, the assessee's representative referred to the balance sheet showing own interest-free funds of ?7,54,94,324 and investments of ?4,25,91,226. The representative argued that previous tribunal decisions had deleted similar disallowances on interest expenditure under Rule 8D(2)(ii) for assessment years 2008-09 and 2010-11. The assessee's contention was supported by citing the law laid down by the Jurisdictional High Court in a specific case. On the contrary, the Department's representative defended the impugned order, but acknowledged that similar issues had been decided in favor of the assessee in previous assessment years.

After hearing both parties and examining the authorities' orders, the Tribunal noted that the balance sheet demonstrated sufficient own interest-free funds to cover the investments, creating a presumption that the investments were made from non-interest bearing funds. Citing the precedent set by the Jurisdictional High Court, the Tribunal ruled in favor of the assessee, deleting the disallowance of ?12,08,801 under section 14A r.w. Rule 8D(2)(ii) related to interest expenditure. Consequently, the appeal of the assessee was allowed, and the order was pronounced on July 2, 2019.