2016 (8) TMI 737 - AT - Income Tax

Appellate Tribunal rules in favor of assessee on Income Tax Act section 14A disallowance.

The Appellate Tribunal ruled in favor of the assessee, holding that the disallowance under section 14A of the Income Tax Act was not warranted. The ... Disallowance u/s. 14A - Held that:- The undisputed facts of the case are that the assessee had shown dividend income of ₹ 25. 99 lakhs that it had not made any disallowance u/s. 14 A of the Act, that the AO after considering the submission of the assessee made a disallowance of ₹ 50. 64 lakhs. We find that the assessee had borrowed the funds for its business (pages 107-09 of the paper book), that it had not invested the borrowed money for making investment that yielded dividend income, that the own funds of the assessee were of ₹ 68. 78 crores, that the investment was of ₹ 12. 26 crores only. In our opinion, if the funds owned by the assessee or more than the investments made no disallowance could be made for interest expenditure. The presumption, as held by the various honorable High Courts, is that the assessee utilised its own funds for making investments. In the case under consideration the AO had not brought on record any fact proving that the loan taken by the assessee was not used for the business purposes. If the assessee had utilised the borrowed funds for its business and not for the investment, there was no justification for invoking the provisions of section 14A of the Act. Therefore, we hold that the order of the FAA confirming the disallowance of ₹ 43. 42 lakhs under the head interest expenses cannot be endorsed. As far as the disallowance made under the head 0. 5% of the average investment is concerned, we would like mention that same should be restricted to 2% of the dividend income. Effective ground of appeal, raised by the assessee, is allowed in its favour, in part. Issues:1. Disallowance under section 14A of the Income Tax Act.2. Justification for disallowance of interest expenditure.3. Interpretation of the provisions of section 14A and Rule 8D of the Income Tax Rules, 1962.4. Application of the presumption regarding the utilization of funds for investments.5. Assessment of disallowance under the head of average investment.Analysis:1. The primary issue in this case revolves around the disallowance of &8377; 50.64 lakhs under section 14A of the Income Tax Act. The Assessing Officer (AO) made this disallowance based on the fact that the assessee had not shown any direct expenditure for earning dividend income or making investments, and had incurred interest expenditure on borrowed funds. The AO invoked Rule 8D of the Income Tax Rules, 1962, to calculate the disallowance. The Appellate Tribunal, however, found that if the funds owned by the assessee exceeded the investments made, no disallowance could be justified for interest expenditure. The Tribunal held that the AO failed to prove that the borrowed funds were used for investments, and thus, the disallowance under section 14A was not warranted.2. The second issue pertains to the justification for disallowance of interest expenditure. The assessee argued that the borrowed funds were utilized for business purposes and not for making investments that generated exempt income. The Tribunal noted that the own funds of the assessee far exceeded the investments, indicating that the borrowed funds were not used for investments. Therefore, the Tribunal held that there was no basis for the disallowance of interest expenditure as the funds were not employed for generating exempt income.3. The interpretation of the provisions of section 14A and Rule 8D of the Income Tax Rules, 1962, was crucial in this case. The AO and the First Appellate Authority (FAA) relied on precedents to uphold the disallowance under section 14A. However, the Tribunal emphasized that the relationship between the expenditure incurred and the income not forming part of the total income must be approximate. The Tribunal also highlighted that the presumption should be that the assessee utilized its own funds for investments, especially when the own funds exceeded the investments made.4. The application of the presumption regarding the utilization of funds for investments played a significant role in the Tribunal's decision. The Tribunal emphasized that if the assessee utilized borrowed funds for business purposes and not for investments, invoking section 14A would not be justified. The Tribunal scrutinized the facts and concluded that there was no evidence to suggest that the loan taken was utilized for generating exempt income, leading to the partial allowance of the appeal.5. Lastly, the assessment of the disallowance under the head of average investment was addressed by the Tribunal. The Tribunal restricted the disallowance under this head to 2% of the dividend income, deviating from the initial calculation. By allowing the appeal in part, the Tribunal modified the disallowance amount and provided relief to the assessee.In conclusion, the Appellate Tribunal's judgment focused on the specific circumstances of the case, emphasizing the necessity for a direct nexus between the expenditure incurred and the income not forming part of the total income. The Tribunal's decision highlighted the importance of substantiating the utilization of funds and ensuring that the disallowance under section 14A is justified based on concrete evidence.