2019 (7) TMI 701 - AT - Income Tax

Condonation of delay - delay of 190 days - illness - HELD THAT - Assessee filed an affidavit affirming therein that at the relevant point time he was ill and doctor advised him to take complete bed rest for 4 months, due to which, the delay occurred and hence, the delay may be condoned as there is no deliberate intention to file the appeal belatedly. As the assessee was prevented by sufficient reason, we condone the delay and admit the appeal for hearing and adjudication. Disallowance u/s 14A r.w.r. 8D - interest income received on the investment made out of the borrowed funds - interest expenditure allowed proportionately to the own funds - assessee has earned interest income, which was adjusted against the interest paid and the difference was declared as income from other sources - HELD THAT - Considering the investment pattern adopted by the assessee during this year, it is clear that assessee has borrowed majority of the funds from lenders and made investment in M/s Pancharatna Metal Processing Ltd. It is clearly an investment activity, which is not earned any income during this year. Rule 8D can be applied only when there is mixed funds available with the assessee, which cannot be segregated, but, considering the financial pattern of the assessee, it is clear that interest expenditure incurred by the assessee is towards investment activities. Therefore, this expenditure can be set off against income from investments. Therefore, assessee cannot claim any expenditure, which is exempt from tax i.e. dividend income as well as share income from partnership firm. Therefore assessee is not eligible to claim portion of interest expenditure incurred towards investment activities, which has not earned any income. CIT(A) has allowed the interest expenditure proportionate to the borrowed funds and own funds. Therefore, we are inclined to accept the findings of the ld. CIT(A) and accordingly, interest expenditure is allowed proportionately to the own funds available with the assessee i.e. 22% and 78% of the interest expenditure is sustained. Accordingly, grounds raised by the assessee are dismissed. With regard to quantum of interest expenditure, the net expenditure to be considered not the total interest expenditure. - Decided against assessee.

Summary

Issues Involved:
1. Delay in filing the appeal.
2. Disallowance under Section 14A of the Income Tax Act.
3. Proportionate allocation of interest expenditure.

Detailed Analysis:

1. Delay in Filing the Appeal:
The appeal in ITA No. 753/Hyd/16 was filed with a delay of 190 days. The assessee submitted an affidavit stating that the delay was due to illness and advised bed rest for four months. The tribunal found sufficient reason for the delay and condoned it, admitting the appeal for hearing and adjudication.

2. Disallowance under Section 14A:
The assessee's income included house property, salary, business income from a partnership firm, and other sources such as dividends. The assessee claimed a loss on account of interest paid amounting to ?12,93,947/-. The AO noticed that the borrowed funds were used for investing in shares, which generated exempt dividend income. Consequently, the AO invoked Section 14A and applied Rule 8D, disallowing ?12,32,966/-.

The CIT(A) observed that the assessee had both interest-bearing and non-interest-bearing funds, which were mixed. The CIT(A) concluded that a proportionate amount of interest expenditure related to exempt income should be disallowed. The ratio of interest-free funds to interest-bearing funds was 22:78. Therefore, 78% of the interest expenditure was disallowed under Section 14A.

3. Proportionate Allocation of Interest Expenditure:
Before the tribunal, the assessee argued that the borrowed funds were used to lend to Pancharatna Metal Processing Ltd., where the assessee was a director. The interest income from such lending was offered for tax, and the interest expenditure should be allowed as a deduction. However, the tribunal found that the balance sheet showed significant investments in shares, indicating that borrowed funds were used for investment purposes.

The tribunal upheld the CIT(A)'s decision, noting that the assessee had mixed funds and the majority of borrowed funds were used for investments that did not generate taxable income. The tribunal agreed with the proportionate disallowance of interest expenditure, sustaining 78% of the disallowance and allowing 22% as it related to the assessee's own funds.

Conclusion:
The tribunal dismissed the appeals, upholding the CIT(A)'s order to disallow 78% of the interest expenditure under Section 14A, proportionate to the borrowed funds used for investments generating exempt income. The decision was pronounced in the open court on 10th July 2019.