2023 (7) TMI 281 - AT - Income Tax

Appeal allowed as Section 14A inapplicable due to absence of exempt income or nexus with borrowed funds.

M/s. Truworth Infotech (P) Ltd. Versus The ITO Ward -2 (2) Jaipur

The Tribunal allowed the appeal of the assessee, overturning the CIT(A)'s decision regarding the disallowance of expenses under Section 14A in relation to ... Addition u/s 14A r/w rule 8D - assessee company has made investment in shares of unlisted companies from which either exempt income is generated or no income is generated - sufficiency of own funds - CIT(A) partly allowed the appeal restricting the disallowance on the fresh investment made during the year - HELD THAT:- Assessee made investment in shares of group companies which are partly old investment carried forward from earlier years - interest free funds apart from borrowings are much more than its investment in shares and there is no nexus in between the fresh investment with the interest bearing borrowed funds. AO has also not denied the said facts. There being no income for shares hence obviously there are no administrative and other expenses incurred. In such facts of the case, no disallowance u/s 14A r.w. rule 8D is warranted as no borrowings were used in acquisition of these shares nor any administrative expenses etc. were incurred. The assessee also not earned exempt income and hence section 14A is inapplicable. See South Indian Bank Ltd. case [2021 (9) TMI 566 - SUPREME COURT] Assessee made the investments from its interest free funds/ income and it does not come under the purview of Section 14A to make disallowance by the lower authorities. Decided in favour of assessee. Issues Involved:1. Application of Section 14A of the IT Act, 1961 read with Rule 8D of the IT Rules, 1962.2. Disallowance of expenses under Section 14A in relation to investment in shares.Summary:Issue 1: Application of Section 14A of the IT Act, 1961 read with Rule 8D of the IT Rules, 1962The assessee filed an appeal against the order of the CIT(A), NFAC, Delhi, which upheld the application of Section 14A of the IT Act, 1961 read with Rule 8D of the IT Rules, 1962. The AO had made a disallowance of Rs. 10,53,684/- under Section 14A, asserting that the assessee company had invested in shares of unlisted companies amounting to Rs. 1,49,29,900/-, from which either exempt income or no income was generated. The CIT(A) partly allowed the appeal, restricting the disallowance to the fresh investment of Rs. 50,00,000/- made during the year, based on the presumption that the opening balance of capital and reserves was already locked in fixed assets, loans, and advances, with no fresh capital introduced during the year.Issue 2: Disallowance of expenses under Section 14A in relation to investment in sharesThe assessee contended that Section 14A was inapplicable as no exempt income was generated from the investment in shares. The assessee argued that its interest-free funds were sufficient to cover the investment, and there was no nexus between the fresh investment and interest-bearing borrowed funds. The AO, relying on CBDT Circular No. 5 dated 11-02-2014, disallowed Rs. 10,53,684/- under Section 14A read with Rule 8D. The assessee cited several judicial pronouncements, including the Supreme Court's decision in South Indian Bank Ltd. vs. CIT, which held that if investments are made from interest-free funds, disallowance under Section 14A is not warranted. The assessee also referred to other cases where courts held that no disallowance under Section 14A should be made if no exempt income is earned during the year.Tribunal's Decision:The Tribunal, after hearing both parties and reviewing the materials on record, concluded that the assessee's interest-free funds were sufficient to cover the investment in shares, and there was no nexus with borrowed funds. The Tribunal relied on the Supreme Court's decision in South Indian Bank Ltd. vs. CIT, which supported the assessee's claim. The Tribunal held that Section 14A was inapplicable as the assessee did not earn any exempt income during the year. Consequently, the Tribunal allowed the appeal of the assessee, overturning the CIT(A)'s decision.Result: The appeal of the assessee is allowed.Order pronounced in the open court on 04/07/2023.