2022 (1) TMI 789 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Sufficiency of own funds - HELD THAT - The Hon'ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT has held that where an assessee possessed sufficient interest free funds of its own which were generated in the course of relevant financial year, apart from substantial shareholders funds, presumption gets established that the investments in sister concerns were made by the assessee out of interest free funds and, therefore, no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. In reaching this conclusion, the Hon ble High Court relied on the judgment of the Hon ble Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT 1997 (3) TMI 5 - SUPREME COURT - Similar view has been taken by the Hon'ble Dehi High Court in CIT vs. Tin Box Company 2002 (11) TMI 75 - DELHI HIGH COURT holding that when the capital and interest free unsecured loan with the assessee far exceeded the interest free loan advanced to the sister concern, disallowance of part of interest out of total interest paid by the assessee to the bank was not justified. More recently, the Hon ble Supreme Court in CIT(LTU) VS. Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT has reiterated the same view. 6. When we examine the amount of Investments in the extant case at ₹ 98.45 lakh as against the availability of Share Capital and Reserves at ₹ 58.16 crore, it is manifested that the amount of such Investments is much less than the amount of shareholders fund. Respectfully following the precedent, we order to delete the disallowance under Rule 8D - Decided in favour of assessee.

Summary

Issues:
Confirmation of disallowance under section 14A of the Income-tax Act, 1961 read with Rule 8D.

Analysis:
The appeal was filed against the CIT(A)'s order for the assessment year 2015-16, specifically challenging the disallowance of ?1,59,430 made by the Assessing Officer under section 14A. The assessee had earned dividend income of ?2,24,707, claimed as exempt, without offering any disallowance under section 14A for taxation. The AO computed the disallowance under Rule 8D at ?1,59,430, being one half of the average value of investments. The CIT(A) upheld this decision, stating that the presumption of investments being financed by own funds did not hold true in this case post the insertion of Rule 8D. Despite the absence of the assessee during the hearing, it was established that the investments yielding exempt income were ?98.45 lakh, while the shareholders' fund stood at ?58.16 crore.

The Tribunal referred to the decision of the Bombay High Court in CIT vs. Reliance Utilities and Power Ltd., where it was held that if an assessee possessed sufficient interest-free funds apart from substantial shareholders' funds, the presumption was that investments were made out of interest-free funds. This principle was supported by judgments of the Supreme Court and the Delhi High Court. In this case, with investments at ?98.45 lakh and shareholders' fund at ?58.16 crore, the Tribunal concluded that the investments were significantly less than the shareholders' fund. Following the precedent, the Tribunal ordered the deletion of the disallowance under Rule 8D amounting to ?1,59,430.

Therefore, the appeal was allowed, and the disallowance under Rule 8D was deleted based on the principle that investments were made out of interest-free funds due to the substantial shareholders' fund available, as established by the precedents cited.