Net Taxable Interest Higher Than Expense Bars Disallowance u/s. 14A: ITAT [Read Order]

The bench of the Income Tax Appellate Tribunal, Mumbai, has ruled that no disallowance under Section 14A of the Income Tax Act, 1961 can be made when net taxable interest income exceeds the interest expenditure, and further held that interest on borrowed capital invested in a partnership firm must be allowed as business expenditure.

Shringar Developers Private Limited, the appellant, had filed its return of income for the Assessment Year 2016-17 declaring income of ₹7,13,020. The return was processed under Section 143(1) and later picked for scrutiny. The Assessing Officer (AO), upon scrutiny, noted investments of over ₹5,32,20,195 in partnership firms Karwa & Kewal Kiran Realtors and Mahavir Developers, where share of profit was claimed as exempt under Section 10(2A).

The AO held that borrowed funds were used for capital contribution and proceeded to compute disallowance under Section 14A read with Rule 8D, amounting to ₹43,34,947.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] partly reduced the disallowance but sustained ₹35,67,897 under Section 14A and an additional disallowance of ₹7,67,050 under Section 36(1)(iii).

Represented by Yogesh Thar and Deep Chauhan, the appellant argued that since taxable interest earned was higher than interest paid, netting off must be permitted. It was contended that capital contribution to a partnership firm inherently involves commercial expediency, and therefore disallowance for want of such expediency was baseless.

Represented by Bhangepatil Pushkaraj Ramesh, the Revenue supported the AO’s findings and relied upon the Special Bench ruling in Vishnu Anant Mahajan v. ACIT (2012), maintaining that interest on borrowed funds invested in firms yielding exempt income must be disallowed.

The Bench comprising Vice President, Saktijit Dey and Accountant Member, Narendra Kumar Billaiya observed that the assessee had paid interest of ₹41,04,638 while earning taxable interest of ₹48,53,903, thereby resulting in positive net taxable income.

Relying on judicial precedent of Bombay High Court in CIT v. Jubilant Enterprises Pvt. Ltd. (2019), the Tribunal held that netting of interest is permissible, and hence no disallowance can be made under Section 14A.

Further, the Tribunal held that contribution of borrowed capital in a partnership firm is a business decision reflecting commercial expediency, making the disallowance under Section 36(1)(iii) unsustainable.

Accordingly, both disallowances were deleted.

Therefore, the appeal was allowed in favour of the assessee.

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