2023 (11) TMI 584 - AT - Income Tax

Addition u/s 14A - sufficiency of own interest-free funds or not? - as alleged assessee had paid huge interest to various persons on unsecured loans during the year under consideration - Addition made as it was not possible for the assessee to prove it s contention that interest free funds have been utilized for making investment for the purposes earning exempt income, since, assessee was having mixed funds - CIT(A) partly allowed the appeal of the assessee by restricting the disallowance u/s. 14A of the Act to the amount of exempt income earned by the assessee - HELD THAT - The Gujarat High Court in numerous decisions has consistently taken the position that if interest-free funds available with the assessee exceed the investments made in funds yielding exempt income, then no disallowance is called for under section 14A of the Act. In the case of Hitachi Home and Life Solutions (I) Ltd. 2013 (7) TMI 359 - GUJARAT HIGH COURT held that where assessee's interest free funds exceeded investment made for earning exempted dividend income, disallowance under section 14A was not justified. Also in case of Gujarat Fluoro chemicals Ltd. 2020 (10) TMI 252 - GUJARAT HIGH COURT again reiterated that where interest free funds available with assessee were far more than gross investment, it could safely be harboured that interest bearing funds was not invested by assessee and, thus, no disallowance under section 14A to be made. Thus no disallowance is called for in respect of interest expenses under section 14A of the Act, when the assessee is having sufficient interest-free funds at its disposal, in excess of investment made in instruments yielding exempt income . Decided in favour of assessee.

Summary

Issues:
The judgment pertains to an appeal for the assessment year 2016-17 arising from the order of the CIT(A), Jamnagar, under section 250 of the Income Tax Act, 1961.

Issue 1: Disallowance under section 14A of the Act
The Assessing Officer observed that the assessee had paid interest on unsecured loans and earned exempt income from shares and mutual funds. The AO made a disallowance under section 14A due to the inability of the assessee to precisely identify the utilization of funds. The CIT(A) partly allowed the appeal by restricting the disallowance to the amount of exempt income earned by the assessee. The appellant contended that no disallowance was warranted as she had sufficient interest-free funds exceeding the investments made for earning exempt income.

Details for Issue 1:
The Assessing Officer disallowed Rs. 10,19,529 under section 14A as the assessee had interest-free capital but could not specify the utilization of funds. The CIT(A) restricted the disallowance to the exempt income of Rs. 4,93,268 earned by the assessee. The appellant argued that as per established law, no disallowance is warranted when interest-free funds exceed investments for earning exempt income. Citing Gujarat High Court judgments, it was emphasized that if interest-free funds surpass investments in funds generating exempt income, no disallowance under section 14A is justified. The Tribunal concurred with this position and allowed the appeal, ruling that no disallowance was necessary concerning interest expenses under section 14A, given the availability of sufficient interest-free funds exceeding investments in instruments yielding exempt income.

Decision:
The appeal of the assessee was allowed, and no disallowance was deemed necessary under section 14A of the Act due to the surplus interest-free funds available to the assessee compared to investments made for earning exempt income.