2013 (10) TMI 772 - AT - Income Tax

Tribunal allows interest disallowance appeal, dismisses expense disallowance appeal under Section 14-A.

The Tribunal allowed the assessee's appeal regarding the disallowance of interest on borrowed funds used for advance tax payment, citing the availability ... Disallowance u/s 14A of the Income Tax Act – Disallowance on account of interest – Held that:- Sufficient own funds in the form of share capital amounting to Rs. 193.98 lacs and in the form of reserves and surplus amounting to Rs. 1,795.65 lacs were available with the assessee at the relevant time to make the payment of advance tax liability - Profit of the assessee for the year under consideration before tax was Rs. 891.57 lacs which itself was sufficient to cover the advance tax liability. In the case of Commissioner of Income-tax v. Reliance Utilities and Power Ltd. [2009 (1) TMI 4 - HIGH COURT BOMBAY] cited by the ld. Counsel for the assessee, the Hon'ble Bombay High Court has held that when the own funds and borrowed funds are maintained in a mixed manner, a presumption can be drawn that the own funds are utilized by the assessee for making the investments etc. as per its own wish – Keeping in view the ratio of above judgment disallowance u/s 14A is not sustainable – Decided in favor of Assessee. Applicability of Rule 8D read with Section 14A of the Income Tax Act for computation of disallowability – Held that:- Reliance has been placed upon the judgment in the case of Godrej Boyce Mfg. Co. Ltd [2010 (8) TMI 77 - BOMBAY HIGH COURT] - Rule 8D is applicable only prospectively from A.Y. 2008-09 - Disallowance made by the A.O. u/s 14A of the Act is restriced to 5% of the exempt dividend income being fair and reasonable – Decided in favor of Assessee. Issues Involved:1. Disallowance of interest on borrowed funds used for advance tax payment.2. Disallowance of expenses under section 14-A read with Rule 8-D.Issue 1: Disallowance of Interest on Borrowed Funds:The appeal by the assessee concerns the disallowance of Rs. 3,58,021 on interest, as the borrowed funds were allegedly used for advance tax payment. The company, engaged in manufacturing, filed its return declaring income of Rs. 6,97,92,520. The AO disallowed the interest expenditure, which was confirmed by the CIT(A). The Tribunal directed the AO to reevaluate if the advance tax was paid from own funds or borrowed funds. The AO, in the subsequent assessment, disallowed the interest again. The CIT(A) upheld this disallowance, citing findings from the previous order. The Tribunal, considering the company's balance sheet and profits, concluded that the disallowance was not justified. Citing precedent, the Tribunal allowed the appeal, noting that sufficient own funds were available to cover the tax liability.Issue 2: Disallowance of Expenses under Section 14-A read with Rule 8-D:The Revenue's appeal pertains to the disallowance of Rs. 19.04 lacs under section 14-A read with Rule 8-D, which was restricted by the CIT(A) to 5% of the exempt income. Initially, the AO disallowed Rs. 15.99 lacs under section 14-A, which the CIT(A) reduced to 5% of the tax-free dividend income. The Tribunal referred the matter back to the AO following a Special Bench decision. Subsequently, the AO applied Rule 8-D and disallowed Rs. 19.04 lacs. The CIT(A) upheld the 5% restriction based on the Bombay High Court's ruling and previous Tribunal decisions. The Tribunal, in line with the law's prospective application and prior decisions, affirmed the CIT(A)'s order, dismissing the Revenue's appeal.In conclusion, the Tribunal allowed the assessee's appeal regarding the interest disallowance and dismissed the Revenue's appeal concerning expenses under section 14-A read with Rule 8-D.