Nirma Credit & Capital Pvt. Ltd. Vs. Income Tax Officer - (Income Tax Appellate Tribunal) (15 Jul 2022)

If interest-free funds available with the assessee exceed the investments made in funds yielding exempt income, then no disallowance is called for

MANU/IB/0435/2022

Direct Taxation

Present is an appeal filed by the assessee against the order of the Commissioner of Income Tax (Appeals) on ground that, CIT(A) has grossly erred in confirming disallowance under Section 14A of Income Tax Act, 1961 (IT Act) read with Rule 8D of I.T. Rules for Rs.15,28,320.

The primary contention of the counsel for the assessee were two-fold. Firstly, he contended that since the assessee was having substantial interest-free funds at its disposal, Learned CIT(A) erred in confirming the order of the Assessing Officer holding that net interest expense of 65,88,474 has to be considered for disallowing expense under Section 14A of the IT Act. Secondly, the counsel for the assessee contended that no administrative expenses were incurred by the assessee to earn exempt income, and argued that in absence of a specific finding that the assessee had incurred administrative expenses for making exempt investments, no disallowance under Section 14A of the Act is called for.

The Gujarat High Court in numerous decisions has consistently taken the position that, if interest-free funds available with the assessee exceed the investments made in funds yielding exempt income, then no disallowance is called for under Section 14A of the IT Act. In the case of Hitachi Home and Life Solutions (I) Ltd., the Gujarat High Court held that where assessee's interest free funds exceeded investment made for earning exempted dividend income, disallowance under Section 14A of IT Act was not justified. Again, in the case of UTI Bank Ltd, the Gujarat High Court held that, no disallowance could be made under Section 14A of IT Act where assessee's interest-free funds far exceeded its interest-free investments.

In view of the consistent position taken by the Gujarat High Court, as applied to the facts instant case, no disallowance is called for in respect of interest expenses under Section 14A of the IT Act, when the assessee is having sufficient interest-free funds at its disposal in excess of investment made in instruments yielding exempt income.

However, so far as administrative expenses concerned, the counsel for the assessee submitted that no administrative expenses were incurred for earning investment yielding exempt income. However, the assessee company is engaged in the business of non-banking financial institution and it is difficult to accept the proposition that no administrative expenses have been incurred by the company in making investments leading exempt income. Onus to show that no expenditure stands incurred in relation to income not forming part of total income lies squarely on assessee.

In view of the consistent position taken by various Tribunals, CIT(Appeals) has not erred in facts and in law in confirming disallowance in respect of administrative expenses. Assessee's appeal is partly allowed.

Tags : DISALLOWANCE CONFIRMATION LEGALITY