Absence of Proof on Interest-Free Funding for Exempt Investments: ITAT Remands Matter for Verification [Read Order]

The Ahmedabad bench of Income Tax Appellate Tribunal (ITAT) directed a fresh verification of the disallowance made under Section 14A read with Rule 8D, after finding that the assessee had not substantiated its claim of using interest-free funds for making exempt investments.

During the scrutiny assessment, the AO noticed that Intas Biopharmaceuticals Ltd. had investments of ₹24.5 crore in shares and mutual funds but had not offered any expenditure related to such investments.

The AO applied Section 14A read with Rule 8D and made a disallowance of ₹28.36 lakh. The company contended that the investments were made out of its own interest-free funds of ₹350 crore and no borrowed funds were used.

The CIT(A) upheld the disallowance, observing that the assessee had not furnished any fund-flow statement or supporting evidence to establish that no interest-bearing funds were used. The authority further noted that even if no exempt income was earned during the year, Section 14A could still apply where investments capable of generating exempt income existed.

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Before the ITAT, the assessee argued that all investments were strategic in nature and made out of internal accruals. It relied on judicial precedents, including Dipesh Lalchand Shah v. ACIT (Gujarat High Court) and CIT v. Keti Construction Ltd. (Madhya Pradesh High Court), to contend that no disallowance under Section 14A is warranted when investments are made from owned funds.

The assessee also submitted that the AO failed to establish any nexus between borrowed funds and the investments, and hence, the disallowance was mechanical.

The Department countered that the assessee had failed to produce any contemporaneous evidence, such as bank statements or cash-flow reconciliation, to substantiate its claim.

It argued that mere assertions could not displace the presumption under Rule 8D that expenditure is incurred in relation to exempt income. The Department also relied on CBDT Circular No. 5/2014, which clarifies that Section 14A applies even if no exempt income is earned in a given year.

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The Tribunal observed that neither the AO nor the CIT(A) had conducted a detailed verification of the assessee’s claim regarding the source of funds. It noted that while the assessee’s contention of using its own funds appeared reasonable, it lacked documentary support. The Bench held that the issue could not be conclusively adjudicated without proper fund-flow verification.

Accordingly, the two-member bench of Suchithra Kamble (Judicial Member) and Makarand Vasant Mahadeokar (Accountant Member) remanded the matter to the AO with directions to re-examine the flow of funds, nature of investments, and applicability of Rule 8D in light of the judicial precedents cited. The appeal was partly allowed for statistical purposes.

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