Issue: Investment made through borrowed fund, interest on borrowed funds, whether claim in disallowed within the provisions of section 14A r.w. 37 (1)
Sections Involved:
Section 14A r.w. 37 (1) of Income Tax act, 1961
Appeal by Assessee before ITAT: (Relevant Extract)
4. That on the facts and in the circumstances of the case, the learned CIT (A) erred in upholding an ad-hoc disallowance u/s 14A of the Act amounting to Rs.2,92,000/- i.e. 5% of the gross dividend income: on account of management/administrative expenses and other costs alleged to be incurred in earning dividend income.
4.1 That the learned CIT (A) erred on facts and in law in partly confirming the disallowance on a pure estimate even though the AO had brought nothing on record to establish that the appellant had incurred any expenditure on earning dividend income.
Contentions of Department (As per AO’s Odrer):
“1. “On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the disallowance of Rs.12,27,50,000/-made U/S 14A on account of interest paid on the borrowed funds utilized for making investment in shares on which the tax free dividend income of Rs.58,40,028/- has been earned, without appreciating the facts on record. (Interest disallowance was deleted by CIT (A) which has been challenged by Department before honorable ITAT)
2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in restricting the disallowance of Rs.15,00,000/-made u/s 14A on account of proportionate administrative expenses incurred for earning the tax free dividend, to Rs.2,92,000/- i.e. 5% of the gross dividend, without appreciating the facts on record. (Disallowance for admin, management expense made by AO was restricted to Rs 292,000/- by CIT (A).
Observations by ITAT:
iii) Disallowance u/s 14A: Ground No.4 relates to upholding of a part of disallowance u/s 14A of the Act. The A.O. had disallowed an amount of Rs.12,27,50,000/- on account of expenditure of interest relatable to earning of dividend and further had disallowed an amount of Rs.15 lacs relating to administrative expense for earning of dividend income. Ld. CIT(A) has however, deleted the additions on account of interest expenses. In respect of expenses, he has partly allowed relief by holding 5% of gross dividend income as reasonable expenses for earning the income. The assessee is now in appeal for upholding of amount of Rs.2,92,500/- which Ld. CIT(A) has upheld for expenses and revenue is in appeal for deletion of addition of Rs.12,27,50,000/- on account of expenditure of interest Ld. A.R. submitted that the assessee had received an amount of dividend as Rs.58,40,028/-which was received from group companies namely Maruti Countrywide Auto Finance Services Ltd. and GE India Ltd. and investment in these companies were made way back in 1995-96 and 1996-97. Ld. A.R. submitted that the assessee was a cash rich company and investment was made out of internal accruals and the issue of disallowance of interest has already been considered in earlier Assessment Year 1998-99 by the Tribunal in I.T.A. No. 1523/ Del./2003 and our attention was invited to paper book page 35. Ld. A.R. further submitted that the assessee has not incurred any interest expenses in order to make investments in these investments as the assessee had invested out of cash accruals and that too in earlier years. He further argued that no notional deduction in terms of administrative expenses can be made in the absence of any finding of actual incurring of expenditure; the Ld. A.R. relied upon the following case laws:
