ACIT Vs Punj Lloyd Ltd. (ITAT Delhi)
No requirement of law that the assessee should establish nexus between interest free funds and investment which yields exempt income
On perusal of Balance Sheet, AO found that the assessee company made investments in unquoted trade instruments in the shares of subsidiaries, joint ventures and SPVs. The investment included shares of domestic subsidiaries as well as overseas subsidiaries of the assessee company. AO required the assessee to show cause why disallowance u/s 14A r.w. Rule 8D be not made. Assessee replied that the assessee has not earned any exempt income during the year. No expenditure was incurred in relation to investment income which is exempt from tax. The expenditure claimed in P & L account has been incurred wholly and exclusively for the purposes of business. Company has invested in shares out of own funds and not out of interest bearing borrowed funds. Hence, disallowance is not warranted. Moreover, the assessee has already added back Rs. 4,44,270/- on account of section 14A in return/computation of income. However, the explanation was not acceptable to the AO and AO computed disallowance of Rs.10,47,30,878/- being interest expenses under section 14A r.w. Rule 8D and added it to the income of the assessee.
Before the CIT(A)
Assessee contended that the AO did not counter the submission of the assessee that no expense has been incurred and claimed for earning exempt income. The disallowance is made on the assumption that the provision of section 14A r.w. Rule 8D is automatic and mandatory even though no expenses have been incurred in relation to earning exempt income.
CIT(A)’s decision
Relying on Bombay high court decision in CIT Vs Reliance utilities & power Ltd wherein it was held that it is presumed that investments would be out of interest free funds generated or available with the company, if the interest income free funds were sufficient to meet the investment, CIT(A) directed the AO to delete the impugned disallowance observing as under:-
