2013 (12) TMI 407 - AT - Income Tax

Interest disallowance under section 14A upheld as Tribunal rejects Revenue's appeal

The Tribunal dismissed the Revenue's appeal, affirming the deletion of the interest disallowance under section 14A. The investment in tax-free bonds was ... Disallowance of interest u/s 14A – The assessee has earned interest income of Rs.10,50,00,000/- on tax free bonds which is exempt u/s 10(15) – Held that:- The assessee at the relevant time had its own funds in the form of share capital and reserve amounting to Rs.703 crores which were far exceeding the investment of Rs.10.50 crores made by the assessee in tax free bonds - The said investment in tax free funds was made by the assessee out of its own funds – The assessee has not incurred any expenditure on investment in tax free bonds - Following Reliance Utilities Power Ltd. [2009 (1) TMI 4 - HIGH COURT BOMBAY] - When there is a common pool of funds it is presumed that investment yielding tax free returns is made by the assessee out of its own funds – Decided against Revenue. Issues Involved:Disallowance of interest under section 14A for investment in tax-free bonds.Analysis:Issue 1: Disallowance of interest under section 14AThe case involved an appeal by the Revenue against the deletion of disallowance of interest amounting to Rs.42,20,600 made by the Assessing Officer (AO) under section 14A. The assessee, a Company engaged in primary dealer business in Government Securities and Money Market Operations, had filed its return declaring total income of Rs.204,52,14,574, including interest income from tax-free bonds. The AO disallowed the interest expenditure attributable to earning the exempt income, as the assessee failed to prove that the investment in tax-free bonds was made solely from its own funds. The AO estimated the utilization of borrowed funds based on the ratio of total funds, leading to the disallowance of interest under section 14A.Issue 1 Analysis:The assessee contended before the AO that the investment in tax-free bonds was made from its own funds, supported by the RBI Regulation prohibiting borrowings for purposes other than the core business. The CIT(A) accepted this argument, noting the substantial own funds available to the assessee. The CIT(A) held that since the investment in tax-free bonds was made from own funds, no interest disallowance under section 14A was warranted. The Tribunal upheld the CIT(A)'s decision, citing the Reliance Utilities Power Ltd. case where it was held that in the presence of a common pool of funds, investments yielding tax-free returns are presumed to be from own funds. Given the findings and legal precedent, the Tribunal dismissed the Revenue's appeal, upholding the deletion of the interest disallowance under section 14A.Conclusion:The Tribunal dismissed the Revenue's appeal, affirming the deletion of the interest disallowance under section 14A, as the investment in tax-free bonds was established to be made from the assessee's own funds, supported by legal precedent and factual findings.