2021 (5) TMI 667 - AT - Income Tax

Disallowance u/s 14A - Assessee claimed that it has got huge internal accruals and interest free funds for making the investment and therefore, no disallowance should be made u/s. 14A - HELD THAT - Authorities below, therefore, was unable to have an opportunity to examine the interest free funds available with the assessee via-a-vis the investment made during the relevant year under consideration. The case laws relied upon by the assessee in its own case by the Co-ordinate Bench of the Tribunal 2021 (2) TMI 1138 - ITAT PUNE is substantially distinguishable on facts for the reason that in this relevant year, factually it was not established by the assessee and neither therefore, it was examined by the Sub ordinate Authorities that investments were made by the assessee in the year under consideration only from reserves and interest free funds available with the assessee. There is an observation by the Ld. CIT(Appeals) that investments were directly made from OD account where both own funds and interest bearing funds are intermixed. Therefore, it becomes necessary to factually verify whether the entire investments were made only from interest free funds. We are of the considered view, therefore, in the interest of justice, this issue should be remanded back to the file of the Assessing Officer for verification of investments made vis-a-vis interest free funds available with the assessee during the year under consideration Disallowance u/s. 54EC - HELD THAT - Hon'ble High Court in the case of CIT Vs. C. jaichander 2014 (11) TMI 54 - MADRAS HIGH COURT has held that as per the mandate of Section 54EC(1) of the Act, the time limit for investment is six months and the benefit that flows from the first proviso is that if the assessee makes the investment of ₹ 50,00,000/- in any financial year, it would have the benefit of Section 54EC(1) of the Act. The Hon'ble High Court further held that however to remove the ambiguity in the above said provision the legislature by Finance (No.2) Act, 2014, with effect from 1.4.2015, has inserted after the existing proviso to sub-section (1) of Section 54EC of the Act, the second proviso which provides as per the investment made by an assessee in the long-term specified asset out of the capital gains arising from transfer of one or more original assets, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed ₹ 50 lakhs. The said amendment was held to be applicable from assessment year 2015-16 and subsequent assessment years. In assessee's case the investments of the assessee have been made in assessment years 2013-14 and 2014-15. The Finance (No.2) Act, 2014 is effective from assessment year 2015-16 and therefore not applicable to the case of the assessee. Para 21.4 of the said circular (supra.) categorically reads that the amendment is only effective from 01.04.2015 and shall apply in relation to the assessment year 2015-16 and subsequent assessment years. In view thereof, we set aside the order of the Ld. CIT(Appeals) on this issue and direct the Assessing Officer to grant deduction u/s.54EC of the Act to the assessee as per law.

Summary

Issues:
1. Disallowance u/s. 14A of the Income Tax Act, 1961
2. Disallowance u/s. 54EC of the Act

Issue 1: Disallowance u/s. 14A of the Income Tax Act, 1961:
The appellant challenged the disallowance made under section 14A amounting to ?19,31,965. The appellant argued that no disallowance should be made as it had substantial internal accruals and interest-free funds for investments. However, the authorities found that the appellant failed to provide evidence that interest-free funds were solely used for investments. The appellant claimed a presumption that investments were made from interest-free funds, citing a previous case. The authorities noted that investments were made from an OD account, mixing own and interest-bearing funds, invalidating the presumption. The Tribunal remanded the issue to the Assessing Officer for verification, emphasizing the need to establish the source of investments from interest-free funds.

Issue 2: Disallowance u/s. 54EC of the Act:
The appellant sold a windmill, claiming exemption under section 54EC of the Act. The Assessing Officer limited the deduction to ?50 lakhs, citing the maximum permissible limit. The appellant argued that investments of ?1 crore were made in two financial years within the prescribed time frame. The Tribunal analyzed the legal provisions and relevant case laws. It noted that prior to an amendment, an assessee investing ?50 lakhs in each of two financial years could claim the deduction. Following the Madras High Court's interpretation, the Tribunal allowed the deduction for the appellant's investments in two financial years, as the amendment was not applicable to the relevant assessment years. The Tribunal directed the Assessing Officer to grant the deduction under section 54EC of the Act as per law.

In conclusion, the Tribunal partially allowed the appeal for statistical purposes, remanding the disallowance u/s. 14A issue for further verification and directing the grant of deduction u/s. 54EC as per legal provisions.