The primary issue that arises for consideration in these appeals is whether the CIT(A) as well as the Tribunal were right in allowing deduction of interest liability out of other income and the claim of the revenue to disallow the same under section 14A of the Act was justified.
The CIT(A) vide order dated 24.6.2004, Annexure A.II recorded as under:-
“7.2 Keeping in view the above facts and circumstances of the case it is held that the AO was not correct in applying section 14A of the IT Act in disallowing the expenditure on account of interest amounting to 46,91,684/-. It was incumbent on the AO to establish a nexus between the expenditure incurred and the income which was exempt under the Act. Facts clearly do nct support the action of the AO. Dis allowance is accordingly deleted. The AO is directed to recompute the income accordingly.”
Vide order dated 16.5.2008, Annexure A.III, the Tribunal on appeal by the revenue while upholding the finding recorded by the CIT(A) noticed as under:-
We have heard rival submissions and have pursued the material on record. From the reading of Section 14A the Act, it is clear that before making any dis allowance the following conditions are to exist:‑Online GST Certification Course by TaxGuru & MSME- Click here to Join
a) That there must be income taxable under the Act, and
b) That this income must not form part of the total income under the Act, and
c) That there must be an expenditure incurred by the assessee, and
d) That the expenditure must have a relation to the income which does not form part of the total income under the Act.
Therefore, unless and until, there is receipt of exempted income for the concerned assessment years (dividend from shares), we are of the view, Section 14A of the Act cannot be invoked. In this appeal, the revenue has not dispelled the findings of the CIT(A), nor the statement of the assessee before AO that assessee is not in receipt of any dividend income and hence according to us, the Assessing Officer has erred in invoking Section 14A of the Act, to disallow various interest payments on capital account, security deposits and unsecured loans. This conclusion of ours finds support in the decision of Bombay Bench of the Tribunal in the case of Joint Commissioner of Income Tax v. Holland Equipment Co. B. V reported in (2005) 3 SOT 810 (Mumbai) and the relevant portion of the order of the Bombay Bench of the Tribunal is reproduced below:‑
Regarding application of Section 14A of the Act, the contention of the learned Department Representative has to be rejected on the face of it inasmuch as the er tire income of the assessee is taxable under the Act. Section 14A is applicable only when any part of the income is not to be included in the total income of the assessee and the expenditure relating to that part of income is claimed by the assessee as deduction. In such cases only, the expenditure relating to the exempted income can be disallowed and not otherwise. Since in the present case,the entire income is found to be taxable, no dis allowance can be made under section 14A of the Act.
Moreover, the AO has not established the nexus between invested funds and the interest bearing funds, since the investments in shares are in the years 1995-96, 1998-99 and 1999-2000 and the interest dis allowance is for the assessment years 2000-01 and 2001-02. On the contrary perusal of the balance sheet for the year ending 31.3.1995, 31.3.1998 and 31.3.1999, it is clear that interest bearing funds have not been utilized for investment for purchase of shares.
For the aforesaid reasons, we see no reason to interfere with the order of CIT(A) concerning assessment year 2000-01 and 2001-02 and hence the decision of CIT (A) in deleting the dis allowance of interest by invoking section 14A of the Act is correct and in accordance with law.