Section 14A disallowance can be made even if Interest Received is more than Interest Paid

This appeal is against restricting the addition to 6 lacs out of total addition Rs.44,42,330/- made u/s. 14A of the Act. The ld.Sr.DR vehemently argued that the ld.CIT(A) was not justified in restricting the addition. He placed reliance on the assessment order.

On the contrary, the ld.counsel for the assessee submitted that the AO made disallowance by invoking the provisions of section 14A of the Act and applying the Rule 8D of the IT Rules, 1962, but the assessment order is involved in this appeal is AY 2006-07 and, therefore Rule 8D in this year is not applicable. He submitted that the interest income of Rs.6.29 crores is more than the total interest outgo of Rs.4.50 crores and, thus, there is net interest income of Rs. 1.79 crores. Therefore, it cannot be said that the assessee has claimed any expenditure on interest. He submitted that this is so because in assessee’ s case there is a common pool of interest income and interest outgo. Therefore, netting of interest is required in the light of judgement of Hon’ble Apex Court in the case of Keshavji Ravji & Co. vs. CIT reported at (1990) 183 ITR 01(SC). This judgement of the Hon’ble Apex Court has been applied by the Hon’ble Jurisdictional High Court in the case of CIT vs. Wintex Mills Ltd. reported at (2000) 245 ITR 266 (Guj.). Further, ld.counsel for the assessee submitted that the dividend income earned is of Rs.3 lacs.

We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that the Rule-8D is not applicable in the year under appeal. The ld.CIT(A) has decided this issue by observing as under:-

“7.2 I have carefully considered the submission made by appellant and observation made by the Assessing Officer. I follow the decision of Hon ‘ble Mumbai High Court in the case of Godrej & Boyce Mfg. Co. Ltd that Rule 8D is not applicable for AY 2007-08. However, the expenses which are incurred in relation to earning such income were still to be apportioned, as held by the Hon’ble High Court. The assessee ‘s case involves a number of facts and circumstances which makes the apportionment of interest expenses a very difficult task. The following observations  Are made regarding the funds both self and borrowed available with ..

a) the assessee was given a task to establish direct nexus with his own funds or borrowed funds on the date the investments on which no income is taxable were made. The assessee could not establish this.

b) It is a fact that the assessee has substantial own funds and lesser borrowed funds. Although theoretically the investments in the present year could be claimed to be made from own funds, but the possibility of borrowed funds being used for the purpose cannot be categorically ruled out.

c) The assessee had total 6.29 crores as interest income (1.40 crores from FDR and 4.88 crores from delayed payments received from clients of business); and against this the assessee had total interest expenditure of 4.50 crore (1.88 crores paid to clients of business, 2.20 crores paid to bank and 40 Lacs to others). In this way the assessee has actually earned net interest of 1.79 crores.

The apportionment of interest expenses in the above circumstances, considering the above facts with assessee having considerable surplus own money, net interest income rather than expense, but no direct nexus provable one way or the other; can best be an estimate. 1.88 crores paid to clients of business is wholly and 2.20 crores paid to bank is mainly related to payment for depositing margin money’s which has been more than offset by interest income from clients. The remaining interest can be said to be possibly paid for partly business assets and partly for investments, that too which have not been met from own funds. In totality of circumstances, particularly looking at huge own funds and surplus interest income; and in absence of proof that borrowed funds have at all not been used for making investments earning non-taxable income; I consider it reasonable to apportion Rs.4 lacs as interest cost to be disallowed under section 14A. The remaining addition on account of disallowance of interest is deleted.

Further, a reasonable disallowance has to be made to from administrative expenses even if the appellant denies that expenditure was incurred for earning exempted income. Considering the investments made by appellant and dividend… The disallowance is, therefore, restricted to Rs.4,00,000/- from interest expenditure and Rs.2,00,000 from other administrative expenses and the ground of appeal is partly allowed.”

 Since the Rule-8D of I.T.Rules, 1962 is not applicable, therefore in our considered view the AO was not justified in applying the Rule 8D for making disallowance. The ld.CIT(A) has given a finding that the assessee was having substantial funds and lesser borrowed funds. This finding of the ld.CIT(A) is not controverted by the Revenue by placing any contrary material on record, therefore, we do not see any reason to interfere with the finding of the ld.CIT(A), same is hereby upheld. Thus, this ground of Revenue’s appeal is rejected.