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No Disallowance of Interest Expenditure if Interest-Free Funds are more than Value of Investments and Loan Funds haven’t used to make Investments: ITAT

Disallowance - Interest Expenditure - Investments - Loan - Taxscan

The Income Tax Appellate Tribunal (ITAT) Bangalore bench while remitting the matter back to the Assessing Officer (AO) said that if the interest-free funds available with the assessee is more than the value of investments and further the loan funds have not been used to make the investments, then no disallowance out of interest expenditure is called for under rule 8D(2)(ii).

The assessee, M/s. Kingfisher Finvest India Ltd. is engaged in the business of making investment in shares, providing guarantees to group companies.

The assessee earned an exempted income of Rs.4.19 crores. The assessee did not make any disallowance under section 14A of the Act. When questioned, the assessee submitted that the majority of its investments were made in the earlier years, and further the loans taken during the year under consideration were used for general business purposes.

The AO did not agree with the contentions of the assessee and accordingly proceeded to make disallowance under Section 14A of the Act read with rule 8D of Income Tax Rules.

Accordingly, disallowance of Rs.52.10 crores was made under section 14A of the Act, which consisted of interest disallowance of Rs.46.88 crores under rule 8D(2)(ii) and expenditure disallowance of Rs.5.22 crores under rule 8D(2)(iii).

The assessee challenged the addition by filing an appeal before CIT(A), wherein AO was directed to restrict the disallowance under section 14A of the Act to the extent of exempt income earned by the assessee during the year.

The tribunal consisted of Judicial Member, Beena Pillai and Accountant Member, B.R. Baskaran held that there should not be any dispute that, if the assessee is able to demonstrate that the interest-free funds available with the assessee is more than the value of investments and further the loan funds have not been used to make the investments, then no disallowance out of interest expenditure is called for under rule 8D(2)(ii).

“However, since the factual details relating to the issue require examination, we are of the view that the assessee, in the interest of natural justice, should be provided with an opportunity to present its case to the AO, with regard to the disallowance of administrative expenses made under rule 8(D)(iii), it is the submission of the assessee that the majority of expenses debited to Profit and loss account are not related to the exempt income and further the expenses relatable to the exempt income could be identified and the same is lower than the amount computed by the AO under rule 8D(2)(iii). This contention of the assessee also requires examination at the end of the AO,” the Tribunal while remitting the matter back to the AO said.

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