2023 (9) TMI 1496 - AT - Income Tax

Disallowance of interest expenses u/s. 14A r.w.r.8D - AO construed the impugned investment made for earning exempt was made out of borrowed funds - CIT(A) deleted addition having sufficient interest free funds in the form share capital and reserves for making investments earning exempt income - HELD THAT - CIT(A) was rightly deleted the impugned disallowance made by the AO u/s 14A r.w.r 8D in the light of various judicial precedents on the issue that when interest free funds are available, which is more than the investment made for earning exempted income, by the assessee, the presumption is that, investment so made is out of interest free fund. Before us, there is no material to support the case of the Revenue that the assessee had utilized borrowed funds for investment for earning exempt income. Admittedly, similar claim of the assessee was allowed by the CIT (A) for the earlier year, and was accepted by the Revenue. The proposition that if interest free funds are more than that invested in shares and securities to earn exempt income, and that it was not proved that any borrowed funds were utilized for such investments, then the presumption is that the interest free funds were used for making investment and no disallowance under section 14A r.w.r. 8D is permissible, is settled in South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT Thus, CIT(A) has rightly allowed the claim of the assessee and deleted the impugned disallowance made u/s 14A. Decided against revenue.

Summary

Issues Involved:
- Withdrawal of appeals by the assessee
- Disallowance of interest expenses under section 14A of the Income Tax Act, 1961

Withdrawal of Appeals by the Assessee:
The assessee filed a letter requesting to withdraw three appeals, which was confirmed by their counsel. Consequently, all three appeals were dismissed as withdrawn by the Tribunal.

Disallowance of Interest Expenses under Section 14A:
The Revenue's appeal was against the deletion of disallowance of Rs. 5,04,35,666/- made on account of interest expenses under section 14A of the Act. The Assessing Officer (AO) disallowed the amount as the investment for earning exempt income was made out of borrowed funds. However, the assessee contended that no borrowed funds were utilized for the investment and had sufficient interest-free funds available. The Commissioner of Income Tax (Appeals) accepted the assessee's explanation and deleted the disallowance. The Tribunal upheld the decision, citing that when interest-free funds exceed the investment made for earning exempt income, the presumption is that the investment was made from interest-free funds. The Tribunal referred to legal precedents and a Supreme Court decision to support its ruling. As a result, the Tribunal rejected the Revenue's appeal and upheld the deletion of the disallowance.

In conclusion, the Tribunal dismissed the appeals of the assessee as withdrawn and rejected the Revenue's appeal on merit regarding the disallowance of interest expenses under section 14A.