Interest-Free Funds Presumption: ITAT Deletes ₹28.78 Lakh 14A Interest Disallowance for Co-op Bank [Read Order]

The Pune Bench of Income Tax Appellate Tribunal (ITAT) ruled that tax-free investments were presumed to be made from available interest-free funds while deciding an appeal concerning the deletion of an interest disallowance made under Section 14A of the Income Tax Act, 1961.

The Pimpalgaon Merchants Co-operative Bank Ltd. filed an appeal against the order passed by the Commissioner of Income Tax (Appeals), Panaji, arising from the scrutiny assessment framed under Section 143(3) of the Income Tax Act, 1961 for the Assessment Year 2014-15.

The case originated because the Assessing Officer noted exempt income from investments and concluded that no disallowance under Section 14A had been made by the bank. Invoking Rule 8D of the Income Tax Rules, 1962, the authority disallowed interest of ₹28,78,790 and further administrative expenditure at 0.5% of average investments amounting to ₹2,87,590. The first appellate authority sustained the disallowance, leading to the present appeal before the Tribunal.

Appearing for the assessee-bank, Pramod S. Shingte, Chartered Accountant, argued that the interest disallowance was unwarranted as the bank possessed substantial interest-free funds in the form of share capital and reserves far exceeding the investments yielding exempt income.

Reliance was placed on the Supreme Court ruling in Commissioner of Income Tax (Large Taxpayer Unit) v. Reliance Industries Ltd (2019), to contend that when interest-free funds are sufficient to cover the investment, a presumption arises that such investments are made out of interest-free funds and no interest element can be attributed.

Representing the Revenue, Manoj Tripathi, contended that the application of Rule 8D and the resulting computation of interest disallowance under Section 14A was correctly made since the assessee had borrowed interest-bearing funds and had earned exempt income.

The Bench comprising Manish Borad, Accountant Member, and Vinay Bhamore, Judicial Member, partly allowed the appeal. Examining the financial statements placed before the Tribunal, the Bench recorded that interest-free funds available with the bank stood at approximately ₹20.30 crore as of March 31, 2013 and ₹22.07 crore as of March 31, 2014.

In contrast, the investments yielding exempt income were approximately ₹3.33 crore in 2013 and ₹5.27 crore in 2014. The Tribunal noted that the assessment order did not establish that borrowed funds were used for making exempt-income-yielding investments.

Applying the presumption laid down in Reliance Industries (supra), the Bench held that no interest component could be disallowed under Section 14A when sufficient interest-free funds existed. Consequently, the interest disallowance of ₹28,78,790 was deleted. However, the disallowance of ₹2,87,590, computed as 0.5% of average investments under Rule 8D for administrative expenditure, was sustained.

Therefore, the Tribunal partly allowed the appeal, deleting the substantive interest disallowance while retaining the small component attributable to administrative expenses.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates