2017 (5) TMI 582 - HC - Income Tax

Disallowance u/s 14A - Held that - The investment in the earlier year was of ₹ 63,30,41,000/-. At the end of the current year, the amount came to ₹ 67,50,41,000/-. Thus, the increase of ₹ 4,20,00,000/- was on account of transfer of share application money to share allotment. The investments were made in the earlier year and no new investment had been made in the current year. Thus, as concluded that the investments made in the earlier year were made out of own funds of the assessee and no borrowed funds were used for such investments. It was further recorded that the interest paid during the year did not have any nexus to the investments and thus, no tax free income from these investments was earned. The findings above have been recorded by the Tribunal after appreciating the factual position on record and the relevant provisions of law, which have not been shown to be illegal or perverse by the learned counsel for the appellant. Thus, no substantial question of law arises. - Decided against revenue

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Nexus between interest expenditure and earning tax-free income.
3. Disallowance of administrative expenses under Section 14A of the Act.

Analysis:

Issue 1: Disallowance under Section 14A of the Income Tax Act, 1961
The appellant-revenue filed ITA Nos. 14 and 32 of 2017 against the order of the Income Tax Appellate Tribunal (the Tribunal) for the assessment year 2010-11. The Assessing Officer disallowed an amount under Section 14A of the Act, which was later restricted by the CIT(A) to the extent of the exempted income. The Tribunal, however, deleted the entire addition made by the Assessing Officer, stating that the interest expenditure did not have a nexus to the earning of tax-free income. The Tribunal's decision was based on the fact that no new investments were made in the current year, and the investments in the earlier year were made out of the assessee's own funds, not borrowed funds.

Issue 2: Nexus between interest expenditure and earning tax-free income
The Tribunal found that the interest paid during the year did not have any connection to the investments made, leading to the conclusion that no tax-free income was earned from those investments. The Tribunal cited specific findings from the balance sheet and profit & loss account to support its decision. It also referenced a judgment of the Punjab & Haryana High Court to assert that no disallowance on account of interest expenditure under Section 14A of the Act could be made in this case.

Issue 3: Disallowance of administrative expenses under Section 14A of the Act
Regarding the administrative expenses part of the disallowance under Section 14A of the Act, the Tribunal noted that the Assessing Officer did not provide any satisfactory explanation for disregarding the assessee's claim that such expenses were unnecessary. The Tribunal emphasized the necessity of the Assessing Officer recording satisfaction before making such disallowances, citing relevant case law. Ultimately, the Tribunal concluded that no disallowance on account of expenses under Section 14A of the Act could be justified in this case.

In conclusion, the High Court dismissed both appeals by the revenue, as the Tribunal's findings were based on a thorough analysis of the factual and legal aspects of the case, which were not shown to be illegal or perverse. Hence, no substantial question of law arose from the Tribunal's decision.