2016 (1) TMI 1250 - AT - Income Tax

Disallowance under section 14A - Held that - No disallowance under section 14A of the Act can be made if there is no taxable income earned during the year. Assessee has not been able to demonstrate before us with the help of documents that no tax free income has actually been earned during year. In view of this we think it proper to send the case back to the file of the Assessing Officer. If there is no tax free income during the year the Assessing Officer is directed not to make disallowance under section 14A of the Act. Otherwise he has to decide the case as per law. Further on the argument of the assessee that it had sufficient owned funds to make investment we see that for the proposition that in case of mixed funds the assessee having sufficient owned funds to make investment it can be presumed that the investments are made out of owned funds we are guided by the judgments in the case of Bright. Enterprises Pvt. Ltd. Vs. CIT 2015 (11) TMI 342 - PUNJAB & HARYANA HIGH COURT . Though the said judgments were delivered in the context of section 36(1)(iii) of the Act but the proposition laid down is that in the event of mixed funds available with the assessee it can safely be presumed that the investments are made out of owned funds. However since we are sending back the case to the file of the Assessing Officer on the first issue we think it proper to send this issue also to the file of the Assessing Officer and decide the same as per law explained hereinabove. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act for investments made by the assessee.
2. Whether disallowance can be made if no tax-free income was earned during the year.
3. Consideration of interest-bearing funds and non-interest bearing funds for making investments.

Issue 1: Disallowance under section 14A:
The Assessing Officer disallowed an amount under section 14A of the Income Tax Act due to investments made by the assessee. The contention was that interest debited in the Profit & Loss Account was used for running the business, and thus, the income from it was included in the total income. However, the Assessing Officer invoked Rule 8D and made the disallowance. The CIT (Appeals) upheld this decision, stating that the interest expenditure was not directly attributable to any particular income, leading to the disallowance.

Issue 2: Tax-free income and disallowance under section 14A:
The assessee argued that since no tax-free income was earned during the year, no disallowance under section 14A should be made. They relied on judgments of the Punjab & Haryana High Court and the Delhi High Court. The ITAT held that if no tax-free income was earned, no disallowance could be made under section 14A, as per the provisions of the Act prevailing over the Rules. The case was sent back to the Assessing Officer to verify the absence of tax-free income.

Issue 3: Consideration of interest-bearing and non-interest bearing funds:
The assessee claimed to have sufficient non-interest bearing funds for investments, arguing against the disallowance of interest. They cited judgments of the Punjab & Haryana High Court. The ITAT referred to similar judgments and opined that in cases of mixed funds, where the assessee has enough owned funds for investments, it can be presumed that the investments are made from owned funds. As the case was sent back to the Assessing Officer on the first issue, this matter was also directed to be decided accordingly.

In conclusion, the ITAT allowed the appeal of the assessee for statistical purposes, emphasizing the importance of considering the presence of tax-free income and the source of funds for investments in determining disallowances under section 14A of the Income Tax Act.