2015 (1) TMI 152 - AT - Income Tax

Disallowance u/s. 14A - Proportionate interest expenses for earning tax free income Held that - The AO has noted that assessee had made investments of ₹ 2.63 cores in DSPMC fund - assessee has pointed to the balance sheet as at 31st March, 2006 and pointed to the fact that the share capital of the partners as on 31st March, 2006 was in excess of ₹ 11.86 cores as against the investments of ₹ 2.63 crore in Reliance and Power Ltd vs. CIT 2009 (1) TMI 4 - HIGH COURT BOMBAY it has been held that if there are interest free funds available to a assessee sufficient to meet its investment and at the same time the assessee has raised a loan it can be presumed that the investments were from interest free funds available - Revenue has not placed any material on record to controvert the submissions made by the Assessee and had also not brought on record any binding contrary decision in its support - no disallowance u/s. 14A on account of interest can be made Decided in favour of assessee. Depreciation claimed on motorcar disallowed Car used for wholly and exclusively for business purpose or not Held that - Assessee has submitted that assessee was allowed depreciation on the same car in immediately preceding financial year by CIT(A) and Revenue has not preferred appeal against the order of CIT(A) - Assessee from the bank statement of the firm has also demonstrated that the funds of the firm has been used for the purpose of purchase of car and further the car is also reflected in the balance sheet of the firm - the claim of the depreciation cannot be denied to the assessee Decided in favour of assessee.

Summary

Issues:
1. Disallowance u/s. 14A for interest expenses on tax-free income.
2. Disallowance of depreciation claimed on a motor car used for business purposes.

Analysis:

Issue 1: Disallowance u/s. 14A for interest expenses on tax-free income:
- The assessee, a partnership firm engaged in business activities, filed its return for A.Y. 2006-07, declaring income. The AO disallowed interest expenses of Rs. 63,450 under section 14A related to tax-free income earned from investments in mutual funds.
- The CIT(A) upheld the AO's decision, stating that the appellant failed to prove the non-utilization of borrowed funds for investments. The CIT(A) relied on the decision of Daga Capital Management Pvt Ltd.
- The ITAT, Ahmedabad, considered the balance sheet showing sufficient interest-free funds available to the assessee. Citing the case law of Reliance and Power Ltd vs. CIT, the ITAT held that no disallowance under section 14A could be made without evidence of borrowed funds' utilization.

Issue 2: Disallowance of depreciation claimed on a motor car:
- The AO disallowed depreciation claimed on a motor car owned by a partner of the firm, as it was not registered in the firm's name. The CIT(A) upheld the AO's decision, stating that the firm must be the owner of the asset for depreciation claim under section 32.
- The ITAT noted that the firm had used its funds to purchase the car, as evidenced by the bank statement and balance sheet. Referring to ICDS Ltd vs. CIT, the ITAT allowed the depreciation claim, emphasizing the asset's usage for business purposes.

In conclusion, the ITAT, Ahmedabad, allowed the appeal of the assessee, overturning the disallowances made by the AO and CIT(A) regarding interest expenses under section 14A and depreciation on the motor car.