2012 (9) TMI 551 - AT - Income Tax

Disallowance of interest and finance charges - Non business investments in UTI Money Market Fund 48 lakhs. When viewed against the substantial reserves and surplus available with assessee it cannot be said for definite that any loan funds were utilized for the purpose of investments. No doubt assessee was unable to show a one-to-one matching between the investments and surplus funds. However the Assessing Officer has also not been able to bring out any link between borrowed funds and investments. Share purchased by the assessee in M/s MPIPL was for having controlling interest therein and AO himself has noted that assessee had purchased 1216 out 2200 shares from the promoters of the said company. It is also not disputed that the said company was engaged in the same line of business - since assessee was having substantial reserve funds with it and the AO had merely gone by a presumption that investments were made out of borrowed funds disallowance under Section 36(1)(iii) was not warranted - against revenue. Disallowance u/s 14A - investments made by the assessee were not out of any surplus funds - CIT(A) deleted the addition - Held that - There is no dispute that during these two years Rule 8D of Income-tax Rules 1962 was not applicable in view of the decision of Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd 2010 (8) TMI 77 - BOMBAY HIGH COURT as Rule 8D applicable from Assessment Year 2008-09 and assessment years in question is 2006-07 and 2007- 08 thus the matter requires a re-visit by the A.O as disallowance for earlier period to be determined on reasonable basis - in favour of revenue for statistical purposes. Disallowance u/s 14A - CIT(A) partially deleted the disallowance to third limb of Rule 8D i.e. 5% on the average value of investments - Held that - As D.R. fairly admitted that Rule 8D was applicable from impugned assessment year and therefore the A.O. was obliged to compute the deduction in accordance with the said rule & had not applied Rule 8D for making disallowance under Section 14A the matter has to go back to the A.O. for consideration afresh in accordance with law - in favour of revenue for statistical

Summary

Issues Involved:
1. Disallowance of interest and finance charges for assessment years 2003-04, 2004-05, and 2005-06.
2. Disallowance under Section 14A of the Income-tax Act for assessment years 2006-07, 2007-08, and 2008-09.

Detailed Analysis:

1. Disallowance of Interest and Finance Charges (Assessment Years 2003-04, 2004-05, and 2005-06):

Background:
The Revenue contested the deletion of disallowance of interest and finance charges by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Assessing Officer (A.O.) had disallowed these charges under Section 36(1)(iii) on the grounds that the assessee made investments in UTI Money Market Fund and M/s Modern Protection and Investigations Pvt. Ltd. (MPIPL) using borrowed funds, which were not for business purposes.

Assessee's Argument:
The assessee argued that the investments were made from its surplus funds and not borrowed funds. The investment in MPIPL was for business expansion in the same line of business, and the UTI Money Market Fund investment was short-term and made from idle funds.

CIT(A) Findings:
CIT(A) found that the investments were made out of the assessee's own funds, which included substantial interest-free reserves. The CIT(A) also noted that the A.O. had not conclusively linked borrowed funds to the investments.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, noting that the assessee had substantial reserves and there was no definitive proof that borrowed funds were used for the investments. The disallowance under Section 36(1)(iii) was deemed unwarranted as the investments were considered to be made from the assessee's own funds.

Conclusion:
The appeals for assessment years 2003-04, 2004-05, and 2005-06 were dismissed, affirming that the disallowance of interest and finance charges was not justified.

2. Disallowance under Section 14A (Assessment Years 2006-07, 2007-08, and 2008-09):

Background:
For assessment years 2006-07 and 2007-08, the A.O. disallowed finance charges and interest payments under Section 14A, asserting that the investments generating tax-free dividends were made from borrowed funds. For assessment year 2008-09, the A.O. did not apply Rule 8D despite its applicability.

Assessee's Argument:
The assessee maintained that the investments were made from substantial interest-free funds and not borrowed funds. The CIT(A) for these years agreed with the assessee, noting that the investments were made from a common pool of funds which included substantial reserves.

CIT(A) Findings:
For assessment years 2006-07 and 2007-08, the CIT(A) relied on judicial precedents to conclude that no disallowance under Section 14A was justified as the investments were made from a common pool of funds. For assessment year 2008-09, the CIT(A) directed the A.O. to recompute the disallowance as per Rule 8D.

Tribunal's Decision:
The Tribunal noted that Rule 8D was applicable for assessment year 2008-09 and the A.O. should have applied it. The Tribunal remitted the cases back to the A.O. for fresh consideration in accordance with the law for assessment years 2006-07, 2007-08, and 2008-09.

Conclusion:
The appeals for assessment years 2006-07, 2007-08, and 2008-09 were allowed for statistical purposes, requiring the A.O. to reconsider the disallowances afresh.

Summary of Results:
- Appeals for assessment years 2003-04, 2004-05, and 2005-06 were dismissed.
- Appeals for assessment years 2006-07, 2007-08, and 2008-09 were allowed for statistical purposes, remitting the issues back to the A.O. for fresh consideration.