No Proportionate disallowance of Interest u/s 14A if investments in shares been made from interest free funds

CA Sandeep Kanoi

Issue and Facts of the Case- During the course of assessment proceedings, on perusing the balance sheet A.O. noticed that Assessee had investments of Rs. 6,23,03,240/- in the shares and securities of its group companies. He also noticed that Assessee had obtained interest bearing secured loans of Rs. 19.25 crores and unsecured loan of Rs. 81.29 crores and had paid interest and financial charges of Rs. 10.10 crores. A.O. was therefore of the view that interest bearing business funds has been diverted and utilized for the purpose of purchase of shares. The assessee was asked to explain as to why proportionate disallowance of financial expenses not be made under section 14A of the Act. Assessee interalia submitted that investments were made in the year 2001-02 & 2002-03 and at that time it was having Reserves and Surplus far in excess of investments. It was further informed that the export credit facility obtained from the bank was exclusively used for the purpose of exports. It was further submitted that disallowance of Rs. 13,11,030/- under section 14A made while finalizing the assessment for A.Y. 06-07 was deleted by CIT(A) and therefore no disallowance u/s. 14A needs to be made. The submissions of the Assessee was not found acceptable to the A.O. He worked out proportionate interest expenditure of the investments made in shares at Rs. 13,11,030/- under section 14A and disallowed the same.

Contention Raised by the Assessee- The ld. A.R. on the other hand submitted that the investments of Rs. 6.23 crores were made in earlier years which includes investments of Rs. 4.59 crores made in F.Y. 2001-02, Rs. 1.59 crores in F.Y. 2002-03 and it were made from interest free unsecured loan from associate concerns. The investments in UCO Bank and Shanti Processors aggregating to Rs. 5.3 lacs were made in the year where the free reserves and surplus of Assessee were far in excess of the investments. He therefore submitted that no interest bearing borrowed funds have been used for making investments and therefore no disallowance u/s 14A was called for.

Held :-We find that CIT(A) while deleting the addition has noted that the Assessee was having sufficient interest free funds and therefore there was no justification for presuming that any part of interest bearing loan has been utilized for the purpose of making investments. He has further noted that the capital and reserves of the Assessee was to the extent of Rs.66 crores as against the investment of Rs. 6 crores which also shows that there cannot be any presumption of use of borrowed funds for such investments. The Assessee has submitted that major investments made in earlier years were out of interest free unsecured loans. This submission of Assessee has not been controverted by Revenue by bringing any contrary material on record. Before us, the Revenue has not controverted the findings of CIT(A) by bringing any contrary material on record. In view of the aforesaid facts, we find no reason to interfere with the order of CIT(A) and thus this ground of Revenue is dismissed.