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        Appeal allowed due to lack of nexus between interest expenses and non-business investments.

        M/s. Pragati Vanijya Ltd. Versus Asstt. Commissioner of Income Tax

        M/s. Pragati Vanijya Ltd. Versus Asstt. Commissioner of Income Tax - TMI Issues Involved:
        1. Disallowance of interest expenses amounting to Rs. 42,50,000.
        2. Applicability of Section 14A of the Income Tax Act.
        3. Charging of interest under Section 234B of the Income Tax Act.

        Detailed Analysis:

        1. Disallowance of Interest Expenses:
        The primary issue in this appeal was the disallowance of Rs. 42,50,000 made by the Assessing Officer (AO) on account of interest expenses. The AO observed that the assessee had borrowed funds and paid interest, but invested a significant portion of these funds as share application money in M/s Sarvesh Coal Tech Pvt. Ltd., which was not connected to the assessee's business and did not generate any income. The AO concluded that the borrowed money was diverted for non-business purposes and calculated a notional interest of 10% on Rs. 4,25,00,000, adding the same to the income of the assessee.

        The assessee contended that it was a Non-Banking Financial Company (NBFC) engaged in financing and investment activities, authorized by its Memorandum of Association. The assessee argued that the funds borrowed were used for business purposes, including the advancement of share application money, which was within its business activities. The assessee also highlighted that the unsecured loans were received in the preceding year and utilized for business activities, and no disallowance was made in that year.

        The Tribunal observed that the assessee had sufficient interest-free funds (Share Capital and Reserves & Surplus) amounting to Rs. 5,90,39,195, which exceeded the share application money of Rs. 4,25,00,000. Therefore, the interest-free funds were sufficient to cover the investment, and there was no nexus between the interest-bearing funds and the non-business investment. The Tribunal relied on the principle established in CIT Vs Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom.) that if interest-free funds are sufficient to meet the investments, it can be presumed that the investments were made from interest-free funds. Consequently, the disallowance made by the AO was not justified and was deleted.

        2. Applicability of Section 14A:
        The AO and the CIT(A) held that the interest expenses could not be allowed as a deduction under Section 36(1)(iii) or Section 37 of the Income Tax Act, and even if allowed, it would be hit by the provisions of Section 14A, as the income from shares (dividend) does not form part of the total income.

        The Tribunal noted that the provisions of Rule 8D of the Income Tax Rules, 1962, were not applicable for the assessment year 2007-08, as they were inserted w.e.f. the assessment year 2008-09. Moreover, since the assessee had sufficient interest-free funds to cover the investment, the disallowance under Section 14A was not warranted.

        3. Charging of Interest under Section 234B:
        The assessee contended that the interest under Section 234B was wrongly charged as the additions made were not foreseeable, and therefore, there was no default in advance tax payment. The Tribunal held that the issue of charging interest under Section 234B was consequential in nature and directed accordingly.

        Conclusion:
        The appeal of the assessee was allowed. The disallowance of Rs. 42,50,000 on account of interest expenses was deleted, and the applicability of Section 14A was negated due to the sufficiency of interest-free funds. The issue of charging interest under Section 234B was deemed consequential.

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        ActsIncome Tax
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