Interest Expenses can’t be disallowed When Assessee had enough Own Funds which was more than Investments which yielded Tax Free Income: ITAT [Read Order]

Kolkata bench of Income Tax Appellate Tribunal (ITAT) recently held that interest expenses can’t be disallowed when assessee had own funds which was more than the investments yielded tax free income.

In the instant case, the assessee is a company engaged in the business of construction and dealing in shares. During the assessment year, the assessee earned dividend income of Rs. 22,16,243 and  capital gain on sale of shares at Rs60,84,416 and also claimed exemptions under section 10(34) and section  10(38) of the Income Tax Act 1961 respectively. The assessee did not make any disallowance under section 14A of the Act.

During the assessment period the Assessing Officer (AO) found that disallowance under section 14A of the act with reference to the clauses (i), (ii) and (iii) to sub-rule (2) of Rule-8D is warranted in the case of assessee. He was of the opinion that the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt. He also contended that an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income.

On appeal, the assessee got relief from CIT (A). aggrieved by the order, the Revenue approached the tribunal contending that while working the average value of the investments for the purpose of Rule 8D(2)(iii) of the Rules, only investments which yield dividend income should be considered and not deleting the addition of Rs.3,266 which was the demat charges which was already shown by the assessee in its computation of income.

After hearing the rival submissions of both the parties the Kolkata bench comprising of Judicial Member N.V.V.Vasudevan and Accountant Member Dr.A.L.Saini observed that while the computation of total income the AO a sum of Rs. 3,266 has already been added to the profit as per profit & loss account. Thereafter making the addition of the same as disallowance under section 14A of the act would be a double addition; therefor it directed to delete the addition.

The tribunal bench noted that as far as disallowance of interest expenses under Rule 8D(2)(ii) of the Rules is concerned, it is clear from the summarized balance sheet of the assessee during the financial years that the assessee had non-interest bearing funds sufficient to cover the investments made in shares. While allowing the appeal filed by the assessee the division bench also held that where interest free funds and overdraft and loans taken are available with an assessee, then a presumption would arise that the investments would be out of the interest free funds generated or available with the assessee, if the interest free funds were sufficient to meet the investments.