By TIOL News Service

MUMBAI, APR 16, 2019: THE ISSUE IS - Whether disallowance u/s 14A is to be restricted to the extent the investment expenditure exceeds the interest free funds. YES IS THE ANSWER.

Facts of the Case

The Revenue Department had preferred the present appeal challenging the action of ITAT in deleting the disallowance made u/s 14A of Rs.16.76 lakhs ignoring the fact that the assessee had failed to demonstrate the exact availability of the interest free funds available in hand at the time of making the said investments.

On appeal, the HC held that,

++ as far as disallowance u/s 14A is concerned, the Tribunal found that the assessee had interest free funds in excess of the investments made for the purpose of earning exempt income. In that view of the matter, the Tribunal referred to and relied upon the decisions of this Court in case of Commissioner of Income-Tax Vs. Reliance Utilities and Power Ltd. - 2009-TIOL-27-HC-MUM-IT and Commissioner of Income Tax Vs. HDFC Bank Limited - 2014-TIOL-1274-HC-MUM-IT. In case of Reliance Utilities and Power Ltd., the Court had held that if there are funds available both interest free and interest bearing, then presumption would arise, that investment would be out of interest free funds available with the company. If interest free funds were sufficient to meet such investment, no disallowance would be made. After referring to this decision, this Court in case of HDFC bank, observed that the Tribunal had come to the factual finding that the assessee had its own funds and that such non-interest bearing funds were in excess of investments in tax free securities. In such circumstances, the Court held that disallowance u/s 14A could not have been made;

++ it is noted that the facts described in the referred cases of HDFC and Reliance are similar as that of the present case. The Tribunal therefore, correctly deleted the disallowance in three out of four assessment years and restricted the same in forth year to the extent the investments exceeded the interest free funds. The counsel for Revenue however submitted that the assessee failed to demonstrate that in the present year only interest free funds were diverted for making tax free investment. As held by this Court, once the presumption that the interest free funds were utilized for making exempt investment, it would be for the Revenue to establish to the contrary which in the present case has admittedly not been done.

(See 2019-TIOL-827-HC-MUM-IT)