Section 14A Interest Disallowance Deleted Due to Availability of Interest-Free Funds

Pimpalgaon Merchants Co-op. Bank Vs ACIT (ITAT Pune)

The appeal before the Income Tax Appellate Tribunal, Pune concerned disallowance made under Section 14A of the Income Tax Act, 1961, for Assessment Year 2014–15 in the case of a co-operative bank. The Assessing Officer (AO) noted that the assessee had earned exempt income from investments but had not made any suo motu disallowance. Observing that the assessee had borrowed interest-bearing funds, the AO invoked Rule 8D of the Income Tax Rules, 1962, and made a total disallowance of ₹31,33,380. This comprised interest disallowance of ₹28,78,790 under Rule 8D(2)(ii) and administrative expenditure disallowance of ₹2,87,590 under Rule 8D(2)(iii). The Commissioner (Appeals) upheld the disallowance.

Before the Tribunal, the assessee contended that it had substantial interest-free funds far in excess of the investments yielding exempt income and therefore, following the presumption laid down by the Supreme Court in Reliance Industries Ltd., investments should be deemed to have been made out of interest-free funds. The Tribunal examined the audited financial statements and found that the assessee possessed interest-free funds of about ₹20.30 crore as on 31.03.2013, which increased to approximately ₹22.07 crore as on 31.03.2014. In contrast, investments (other than inter-bank deposits) were only about ₹3.33 crore and ₹5.27 crore respectively.