2016 (4) TMI 1405 - AT - Income Tax

Appellate Tribunal rules in favor of appellant on disallowance under Income Tax Rules

The Appellate Tribunal ruled in favor of the appellant, holding that the disallowance under section 14A r.w. Rule 8D of the Income Tax Rules, 1961 was not ... Disallowance made u/s. 14A r.w.r Rule 8D - assessee argued that investment in shares had been made out of non interest bearing funds - HELD THAT:- We find that the assessee had share capital of ₹ 60,48,00,000/-and reserves & surplus stood at ₹ 1,74,67,67,552/-,whereas the investment was at ₹ 2,06,66,62,442/-,that out of the said investment the assessee had made investment in properties also,that the fresh investment in the shares was not very huge,that it had made strategic invesment,that there was no evidence to prove that borrowed funds were utilised for making investment in shares. In our opinion,the settled position of law stipulate that the if the assessee has sufficient own funds then it should be presumed that investment was not made from borrowed funds. Considering the availability of funds we are of the opinion that the AO was not justified in disallowing interest expenditure.Similarly, disallowance as per the provisions of section 14A r.w.rule 8D of the Rules cannot be made in a mechanical manner.Thirdly,the disallowance cannot be more than the expenditure claimed by an assessee. See K. RAHEJA CORPN. (P) LTD. [2011 (8) TMI 148 - BOMBAY HIGH COURT] - Decided in favour of assessee. Issues involved:1. Disallowance made under section 14A r.w. Rule 8D of the Income Tax Rules, 1961.Detailed analysis:The appellant, a company engaged in real estate development and hotelier business, challenged the order of the CIT(A) regarding the disallowance made under section 14A r.w. Rule 8D of the Income Tax Rules, 1961. The Assessing Officer (AO) had determined the income of the assessee at Rs. 47.72 crores, making a disallowance of Rs. 9.45 crores under section 14A. The AO found that the assessee had received dividends, made investments in shares of various companies, and paid interest on borrowed funds. The AO made the disallowance based on the provisions of section 14 r.w. Rule 8D, which resulted in a disallowance of Rs. 9.45 crores.During the appellate proceedings before the First Appellate Authority (FAA), the assessee argued that the investments in shares were made out of non-interest-bearing funds and cited relevant case laws. However, the FAA upheld the AO's order, stating that the AO was not precluded from making a reasonable disallowance under section 14A by estimating attributable expenditure. The FAA rejected the distinction between borrowed and interest-free funds for the purpose of section 14A.Before the Appellate Tribunal, the Authorized Representative (AR) contended that the assessee had sufficient own funds, and the increase in investments was due to investments in immovable properties. The Tribunal noted that the assessee had substantial share capital and reserves, and the investments were not significantly large. It was observed that there was no evidence to prove that borrowed funds were used for share investments. The Tribunal held that if the assessee had sufficient own funds, it should be presumed that investments were not made from borrowed funds. The Tribunal also emphasized that disallowances under section 14A r.w. Rule 8D should not be made mechanically and cannot exceed the expenditure claimed by the assessee. Relying on previous decisions in the assessee's favor, the Tribunal decided the effective ground of appeal in favor of the assessee, allowing the appeal.In conclusion, the Appellate Tribunal ruled in favor of the assessee, holding that the disallowance made under section 14A r.w. Rule 8D was not justified, given the availability of own funds and the absence of evidence linking borrowed funds to share investments. The Tribunal emphasized that disallowances should be based on established legal principles and cannot exceed the claimed expenditure.