Bombay HC deletes addition on Interest Expenditure on availability of Interest-Free Surplus Fund to make Investment [Read Order]

Bombay - HC - Interest - Expenditure - Interest - Free - Surplus - Fund - Investment - TAXSCAN

The Bombay High Court deleted the addition made on account of interest expenditureas the assessee, Godrej & BoyceMfg. Co. Ltd, had sufficient interest-free surplus funds to make the investment.

The respondent/assessee filed its income tax return, declaring total income under normal provisions and bookprofit under Section 115JB of the Income Tax Act.The return was processed and the case was selected for scrutiny, and a notice was issued to the assessee.

The AOmade various additions/disallowances, which include disallowances under Section 14A r.w. Rule 8D and amounted to Rupees five crores and later the assessment was completed.

The Counsel for the appellant contended that the AO had clearly mentioned that setting off interest costs of dividend incomeagainst other taxable income is against the matching concept of income and expenditure. There was no need torely on any presumption of own funds on account of the changed law that came into force in 2007-08, followed bythe introduction of Rule 8D in 2008-09, which provides for a method of calculation.

The Counsel further contended that the Income Tax Appellate Tribunal (ITAT) ought not to have deleted the addition of interest disallowed by the AO in the absenceof any evidence that indicated that borrowed funds were not used for the purpose of making investments thatyielded exemption. The ITAT should not have considered interest when calculating disallowance under Section 14Aread with Rule 5D because the assessee did not keep a separate account for the investment related to exemptincome.

The respondent contended that, in respect of payments made out of a mixed fund, it is the assessee who has sucha right of appropriation and also the right to assert from what part of the fund a particular investment is made, andit may not be permissible for the department to make an estimation of a proportionate figure.

ABench comprising of Justice Dhiraj Singh Thakur and Justice Kamal Khata observed that “The AO has neitherexamined the claim in respect of expenditure incurred in relation to the exempt income of the assessee norrecorded any satisfaction with regard to the correctness of the assessee’s claim with reference to the books ofaccount. The disallowance made by applying Rule 8D is not only against the statutory mandate but also contrary tothe legal principles laid down”.

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