2013 (10) TMI 278 - AT - Income Tax

Disallowance u/s 14A of the Income Tax Act Held that - Assessee explained investment to the tune of Rs.17.24 crores out of which an amount of Rs. 10 crores was out of the current account of Vysya Bank, in which repayment of loan advanced to Aparna Constructions on 05.02.2007 was credited. Thus, there is a nexus between the borrowed fund to that of investment in mutual fund A.O. was directed to restrict the disallowance to the period for which the borrowed funds were utilised for investment - Issue remitted to the file of the Assessing Officer to work-out the disallowance accordingly Appeal allowed for statistical purpose Decided in favor of Assessee.

Summary

Issues Involved:
Disallowance of interest under sections 14A and 36(1)(iii) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Disallowance of Interest under Sections 14A and 36(1)(iii)
The assessee appealed against the order of the CIT(A) regarding the disallowance of interest of Rs.1,33,50,000 under sections 14A and 36(1)(iii) of the Income Tax Act, 1961 for the assessment year 2008-2009. The Assessing Officer disallowed the interest based on the premise that if the assessee had not invested in mutual funds, the funds could have been used to clear secured loans, thereby reducing interest. The CIT(A) upheld the disallowance, citing a change in the assessee's explanation and a time gap between borrowing funds and investing in mutual funds as reasons for the disallowance.

Issue 2: Arguments Before the CIT(A)
Before the CIT(A), the assessee contended that the borrowed funds were utilized for term deposits and corporate loans, not mutual fund investments. The assessee provided detailed explanations, including the source of funds from internal accruals and business funds, to support their claim that no borrowed funds were used for mutual fund investments. The CIT(A), however, rejected these contentions and confirmed the disallowance.

Issue 3: Tribunal's Decision and Analysis
The Tribunal observed that the Assessing Officer did not establish a direct link between borrowed funds and mutual fund investments. The Tribunal found discrepancies in the Assessing Officer's calculations and the actual investment amounts. It noted that the CIT(A) did not adequately consider the explanations and evidence provided by the assessee regarding the source of funds and investments. The Tribunal directed the Assessing Officer to verify the utilization of borrowed funds for investments and restrict the disallowance to the relevant period. It emphasized that as the assessee had earned interest on deposits, no additional disallowance under sections 36(1)(iii) or 14A was warranted.

Conclusion
The Tribunal allowed the assessee's appeal for statistical purposes, remitting the issue back to the Assessing Officer for a detailed examination of the disallowance. The Tribunal stressed the importance of providing the assessee with a reasonable opportunity to present their case during the reassessment. The judgment highlighted the need for a thorough verification of facts to determine the appropriate disallowance related to interest under sections 14A and 36(1)(iii) of the Income Tax Act, 1961.