2024 (7) TMI 792 - HC - Income Tax

Addition on account of interest expenses u/s 14A r.w.r 8D(2) (iii) - investment made for earning exempt income was made out of the borrowed funds - Sanction granted for filing an appeal before the High Court - CIT(A ) accepting the contentions of the assessee deleted the addition on the ground that the assessee was having sufficient interest in the funds in the form of share capital and reserves for making investments earning exempt income, as upheld by ITAT HELD THAT - Tribunal after considering the facts of the case upheld the conclusion arrived at by the CIT (Appeals) to the effect that the assessee was having the interest free funds which were more than the investment made for earning exempted income. Therefore, the presumption of the AO that the investment so made is out of the interest bearing fund was without any basis in absence of any material to support the case of the Revenue that the assessee had utilised the borrowed funds for investment for earning exempt income. In view of the above facts and concurrent findings of the CIT (Appeals) and the Tribunal, we were astonished how the sanction was granted by the Principal Commissioner of Income Tax (for short the PCIT ) to prefer an appeal and therefore the original file granting sanction was called for. It appears that the sanction for filing the appeal is granted by the Department without considering the facts of the case and in the mechanical manner without application of mind on part of the PCIT. We, therefore, caution the appellant-Revenue to grant sanction to file Appeal before this Court in a fit case only.

Summary

Issues:
1. Whether the Tribunal erred in deleting addition of interest expenses under Section 14A r.w.r 8D(2) (iii) of the IT Rules, 1962?
2. Whether the PCIT's decision to recommend an appeal to the High Court was justified?

Analysis:
Issue 1:
The Tax Appeal involved a dispute regarding the addition of interest expenses under Section 14A of the Income Tax Act, 1961. The appellant-Revenue contended that the investment made for earning exempt income was funded by borrowed funds, leading to the addition of Rs. 5,04,35,666. However, the respondent-Assessee argued that no borrowed funds were utilized for the investment, as there were sufficient interest-free funds available. The CIT (Appeals) and the Tribunal both found in favor of the Assessee, concluding that the investment was made from interest-free funds, and hence, the addition was unwarranted. The High Court upheld the concurrent findings, emphasizing that the Revenue failed to provide evidence supporting the use of borrowed funds for the investment. Therefore, the appeal was dismissed.

Issue 2:
The PCIT recommended an appeal to the High Court based on the tax effect exceeding the prescribed limit, despite the Assessing Officer and Range Head opining in favor of accepting the Tribunal's order. The PCIT's decision was primarily based on the assumption that the Assessee had invested its own funds in fixed assets and failed to establish the use of only interest-free funds for the exempt income investment. The High Court criticized the PCIT's reasoning as contrary to the factual findings of the lower authorities. It noted that the sanction for the appeal seemed mechanical and lacked proper consideration of the case facts. The High Court cautioned the Revenue to grant appeal sanctions judiciously. Ultimately, the High Court held that no substantial question of law arose from the Tribunal's order, leading to the dismissal of the appeal.