2025 (6) TMI 1381 - AT - Income Tax

Disallowance of interest u/s. 14A - as argued assessee has sufficient own funds for making the investments which had earned exempt income - CIT(A) deleted addition - HELD THAT - We see no reason to interfere in the order of the Ld. CIT(A) who we hold has rightly deleted the disallowance of interest made u/s.14A following the proposition of law laid down by the Jurisdictional High Court in Gujarat Industrial Development Corporation 2013 (1) TMI 809 - GUJARAT HIGH COURT that where sufficient own interest free funds are available no disallowance of interest u/s. 14A of the Act is called for and recording a finding of fact in both the assessment years of the assessee having sufficient own interest free funds for making the impugned investments which had earned exempt income. CIT(A) who we hold has rightly deleted the disallowance of interest made u/s.14A as sufficient own interest free funds are available no disallowance of interest u/s. 14A is called for - Assessee appeal allowed. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

- Whether the disallowance of interest expenses under Section 14A of the Income Tax Act, 1961, read with Rule 8D(2)(ii) of the Income Tax Rules, 1962, relating to earning of exempt income, was justified for the assessment years 2011-12 and 2014-15.

- Whether the assessee, having mixed funds and incurring interest expenditure, discharged the onus to establish that there was no nexus between the borrowed funds and the investments earning exempt income, thereby negating the disallowance under Section 14A.

- Whether the appeals filed by the assessee for assessment years 2011-12, 2014-15, and 2015-16 should be treated as withdrawn in view of the settlement of disputes under the VSV Scheme, 2024.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance of Interest Expenses under Section 14A read with Rule 8D(2)(ii) for A.Y. 2011-12 and 2014-15

Relevant Legal Framework and Precedents: Section 14A of the Income Tax Act provides for disallowance of expenditure incurred in relation to income that does not form part of total income (exempt income). Rule 8D prescribes the method for computation of such disallowance, with sub-rule (2)(ii) specifying the manner of calculating disallowance of interest expenditure attributable to earning exempt income.

Judicial precedents from the Jurisdictional High Court and the Tribunal have held that disallowance under Section 14A is warranted only if the revenue establishes a nexus between the borrowed funds (interest-bearing funds) and the investments yielding exempt income. Notably, in cases where the assessee has sufficient own interest-free funds to cover the investments, the presumption is that investments are made out of such own funds, and no disallowance is called for. The Hon'ble Gujarat High Court in CIT vs. Gujarat Industrial Development Corporation, CIT vs. Torrent Power Ltd., CIT vs. UTI Bank Ltd., and CIT vs. Hitachi Home and Life Solutions (1) Ltd. have consistently upheld this principle.

Court's Interpretation and Reasoning: The CIT(A) and subsequently the Tribunal followed the above legal position. The CIT(A) deleted the disallowance on the basis that the assessee had sufficient own interest-free funds to make the investments that yielded exempt income, and the revenue failed to establish any nexus between the borrowed funds and such investments. The Tribunal concurred with this view, emphasizing that the onus lies on the revenue to demonstrate that the interest-bearing funds were used for making the exempt income investments.

Key Evidence and Findings: For A.Y. 2011-12, the assessee's interest-free funds, comprising reserves, surplus, and partner's capital, amounted to Rs. 39,14,51,879, while the investment in shares stood at Rs. 31,40,36,767. Similar facts applied for A.Y. 2014-15. The CIT(A) relied on these figures to hold that sufficient own funds were available to the assessee, negating the need for disallowance under Section 14A.

Application of Law to Facts: Applying the legal principle that disallowance is only warranted when borrowed funds are used for earning exempt income, the Tribunal found that since the assessee had surplus interest-free funds exceeding the investment amount, the disallowance under Section 14A and Rule 8D(2)(ii) was not justified.

Treatment of Competing Arguments: The Revenue contended that the assessee had mixed funds and that the interest expenditure of Rs. 2,78,26,692 (2011-12) and Rs. 1,99,40,540 (2014-15) should be disallowed as there was no proof negating nexus between borrowed funds and investments. The Tribunal rejected this argument, noting the assessee's demonstration of sufficient own funds and reliance on binding judicial precedents.

Conclusions: The Tribunal upheld the deletion of disallowance under Section 14A for both years, dismissing the Revenue's appeals as devoid of merit.

Issue 2: Settlement of Assessee's Appeals under the VSV Scheme, 2024 for A.Y. 2011-12, 2014-15, and 2015-16

Relevant Legal Framework: The Voluntary Settlement of Disputes (VSV) Scheme, 2024, allows taxpayers to settle pending disputes with the Department by applying and obtaining acceptance under prescribed forms (Form No.1 and Form No.2).

Court's Interpretation and Reasoning: The assessee, through its counsel, informed the Tribunal that disputes for all three assessment years were settled under the VSV Scheme, as evidenced by the filing of Form No.1 and Form No.2 with the Department. The Department's representative did not oppose treating the appeals as withdrawn in light of the settlement.

Key Evidence and Findings: The Tribunal was furnished with copies of the application and acceptance forms under the VSV Scheme for the respective years, confirming the settlement.

Application of Law to Facts: Given the settlement under the VSV Scheme, the Tribunal treated the assessee's appeals as withdrawn and dismissed them accordingly.

Treatment of Competing Arguments: There were no competing arguments as the Department concurred with the withdrawal of the appeals.

Conclusions: The appeals filed by the assessee for A.Y. 2011-12, 2014-15, and 2015-16 were dismissed as withdrawn.

3. SIGNIFICANT HOLDINGS

- The Tribunal held: "where sufficient own interest free funds are available, no disallowance of interest u/s. 14A of the Act is called for," reaffirming the principle established by the Jurisdictional High Court.

- The Tribunal noted that "the onus was on the assessee to establish that there was no nexus between the investment and interest expenditure," and upon finding such nexus negated by the assessee's demonstration of sufficient own funds, disallowance was rightly deleted.

- The Tribunal emphasized that "once the nexus regarding the expenditure on account of interest as being attributable to taxable income is proved before the Assessing Officer no disallowance can be made from interest payment which is directly relatable to taxable income."

- The Tribunal dismissed the Revenue's appeals for both assessment years 2011-12 and 2014-15, holding the grounds raised as "devoid of merits."

- The Tribunal treated the assessee's appeals for all three years as withdrawn following the settlement under the VSV Scheme, 2024, and dismissed them accordingly.