2011 (8) TMI 1129 - AT - Income Tax

Assessee's Own Funds Exempt Investments from Disallowance

Shopper’s Stop Ltd. Versus Asstt. Commissioner of Income-tax, Mumbai.

The Tribunal found that the assessee had sufficient own funds to make investments, thus disallowance under Section 14A of the Income Tax Act was not ... Addition u/s 14A - Held that:- Assessee is having sufficient own funds and when he has borrowed funds even if he is having own funds, the presumption always goes in favour of the assessee that the assessee made investments out of own funds, therefore, the provisions of section 14A of the Act, is not applicable to the case of the assessee. In view of the said discussion, we set aside the order of the CIT(A) and delete the disallowance made by the AO u/s 14A of the Act. Accordingly, the grounds raised in AY 2006-07 is allowed. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act, 1961:The appeals pertain to the same assessee and are directed against the orders of CIT(A)-40, Mumbai, for the assessment years 2006-07 and 2007-08. The common issue in both appeals is the disallowance made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, 1961.Facts of the Case: The assessee filed its return of income declaring total income of Rs. 38,75,60,710/- and later revised it to Rs. 35,78,21,940/-. The assessee, running a retail departmental store, made an investment of Rs. 242.1 million in shares of its subsidiary, M/s Crossword Bookstores Ltd. The AO noted that these investments were made out of borrowed funds, as indicated by overdrawn balances in various bank accounts. Consequently, the AO computed interest @ 12% p.a. on a day-to-day basis, amounting to Rs. 1,54,86,125/-, and disallowed the same under Section 14A as expenses incurred in relation to exempt income.CIT(A) Proceedings: The assessee argued before the CIT(A) that the investments were made out of surplus funds and not borrowed funds. Reliance was placed on the decision of the Bombay High Court in CIT Vs. Reliance Utilities and Power Ltd., which presumes that investments are made from surplus funds if both borrowed and surplus funds are available. However, the CIT(A) upheld the AO's findings, stating that the investments were clearly made out of borrowed funds due to overdrawn balances in the bank accounts. The CIT(A) directed the AO to apply Rule 8D of the Income Tax Rules, 1962, for computing the disallowance.Tribunal Proceedings: The assessee contended that it had sufficient own funds to make the investments and relied on the decision of the Bombay High Court in CIT Vs. Reliance Utilities and Power Ltd. The Tribunal noted that the assessee's own funds, including profits and depreciation, were sufficient to cover the investments made. The Tribunal held that if there are sufficient own funds, the presumption is that investments are made from these funds, not borrowed funds. The Tribunal found that the ratio laid down in the Reliance Utilities case applied to the assessee's case. Accordingly, the Tribunal set aside the CIT(A)'s order and deleted the disallowance made by the AO under Section 14A for both assessment years.Conclusion: The Tribunal concluded that the assessee had sufficient own funds to make the investments, and therefore, the provisions of Section 14A were not applicable. The appeals for both assessment years were allowed, and the disallowance made by the AO was deleted.Pronouncement: The judgment was pronounced in the open court on August 30, 2011.