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Nirma Chemical Works Pvt. Ltd. Vs. The Deputy Commissioner of Income Tax - (Income Tax Appellate Tribunal) (15 Sep 2023)

When interest free funds were used for making tax-free investment, no disallowance under Section 14A of IT Act is sustainable


Direct Taxation

In present case, Revenue’s appeal is against deletion of disallowance of Rs.5,04,35,666 made on account of interest expenses under Section14A of the Income Tax Act, 1961.

The learned CIT(A) has rightly deleted the impugned disallowance made by the AO in the light of various judicial precedents on the issue that, when interest free funds are available, which is more than the investment made for earning exempted income, by the assessee, the presumption is that, investment so made is out of interest free fund. There is no material to support the case of the Revenue that, the assessee had utilized borrowed funds for investment for earning exempt income. Admittedly, similar claim of the assessee was allowed by the CIT(A) for the earlier year, and was accepted by the Revenue.

Furthermore, the proposition that if interest free funds are more than that invested in shares and securities to earn exempt income, and that it was not proved that any borrowed funds were utilized for such investments, then the presumption is that the interest free funds were used for making investment and no disallowance under Section 14A read with Rule 8D is permissible, is settled by the Apex court in its decision in South Indian Bank Ltd. vs CIT. Therefore, the learned CIT(A), taking into consideration all aspects, both factual and legal counts, has rightly allowed the claim of the assessee and deleted the impugned disallowance made under Section 14A. Hence, there is no need for any interference. The appeal of Revenue is dismissed.


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