Interest Disallowance Unsustainable where Own Funds Adequate: ITAT Upholds Addition u/s 14A [Read Order]

TheIncome Tax Appellate Tribunal (ITAT) Mumbai Bench has held the deletion of disallowance of interest under Rule 8D(2)(ii) on the ground that if sufficient own funds were available with the assessee, no disallowance of interest would arise. However, it has allowed the administrative expense disallowance underSection 14A of Income Tax Act.

The assessee, Bombay Minerals Limited, had filed its return declaring an income of over ₹72 crores. During the scrutiny assessment, the Assessing Officer (AO) had made several additions to the assessee’s return. These included the disallowance under Section 14A, amounting to ₹1.55 crores.

However,the AO had applied Rule 8D on the ground that the assessee had received exempted dividend income but had not maintained separate accounts to prove the nexus of expenditure.

On filing of an appeal the Commissioner of Income Tax [CIT(A)] observed that the assessee had substantial own funds in the form of share capital and reserves amounting to ₹116.86 crores which was more than its investments of ₹74.74 crores.

Thus, the disallowance of interest was deleted. However, the administrative disallowance of ₹46.51 lakh was sustained.

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Whereas The Revenue department had contended that the assessee had failed to prove a direct nexus between interest-free funds and investments. They had further contended that the presumption had been incorrectly applied by the CIT(A). On the other hand, the assessee had contended that sufficient own funds being available negated the presumption of diversion of borrowed funds.

The Tribunal comprising Om Prakash Kant (Accountant Member) and Kavitha Rajagopal (Judicial Member) upheld the findings of the CIT(A) and had further said the legal position that in the presence of mixed funds and sufficient interest free funds being available for investment, a presumption arises that investments are out of interest-free funds. Thus, the deletion of interest disallowance was upheld.

With regard to administrative expenses no fault had been found in restricting the disallowance to 0.5% of average investments yielding exempt income and upheld the addition.

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