Do you need to disallow expense as per Section 14A of Income Tax Act even if you have sufficient interest free funds?

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Case Law Update

Judgement of High Court of Gujarat in case of PCIT vs. Sintex Industries Ltd [I.T.A No. 291 of 2017]. Further SLP dismissed by SC.

Facts of the case: In A.Y. 2009-10, the assessee had earned dividend income amounting to Rs. 2.02 crores from the investments made in mutual funds as well as equity shares and had suo moto disallowed expenditure of Rs. 5.10 lakhs in the return of income. During the year under consideration, the assessee was having reserve fund of Rs. 1981.55 crores and made investment of Rs. 144.51 crore. The AO made a disallowance of Rs. 90,97,470/- on account of expenditure incurred to earn exempt income as calculated u/s. 14A Rule 8D and disallowance of Rs. 24,37,500/- towards consultancy charges incurred for foreign exchange gain.

Findings: In this case the Ld CIT(A) confirmed the disallowance of expenditure in respect to interest and administrative expenditure of Rs. 90,97,470/- u/s. 14A and deleted the disallowance of expenditure of Rs. 24,37,500 incurred towards foreign exchange gain. On further appeal, the Honourable Tribunal and High Court of Gujarat deleted the disallowance of Rs. 90,97,470/- and Rs. 24,37,500/- as the assessee was already having its own surplus to the extent of Rs. 1981.55 crores against the investment of Rs. 144.51 crores. In the above judgement of High court it was stated that:

Considering the aforesaid facts and circumstances, more particularly the fact that the assessee was already having its own surplus fund and that too to the extent of Rs. 1981.55 Crores against which investment was made of Rs. 144.51 Crores, there was no question of making any disallowance of expenditure in respect of interest and administrative expenses under Section 14A of the Act, therefore, there was no question of any estimation of expenditure in respect of interest and administrative expenses of Rs. 24,37,500/- under rule 8D of the Rules. Under the circumstances and in the facts of the case, narrated hereinabove, it cannot be said that the learned Tribunal has committed any error in deleting the disallowance of expenditure of Rs. 90,97,470/- incurred in respect of interest and administrative expenses under Section 14A of the Act. We are in complete agreement with the view taken by the learned Tribunal. At this stage, decision of Division Bench of this Court in the case of Principal Commissioner of Income-tax vs. India Gelatine & Chemicals Limited, reported in [2015] 376 ITR 553 [Gujarat] needs a reference. In the said decision, it is observed and held by the Division Bench of this Court that when the assessee had sufficient interest-free funds out of which concerned investments had been made, disallowance under Section 14A is not justified.”

Therefore, on the observation of the above judgement, it is stated that no disallowance of any expenditure can be made u/s. 14A when the assessee have sufficient interest free funds against the investments made from which exempt income is generated.

The SLP filed by the Department against the above decision was dismissed by Supreme Court in PCIT vs. Sintex Industries Pvt. Ltd. [(2018) 93 taxmann.com 24 (SC)]

Relying on the said judgement, The Honourable Ahmedabad ITAT Bench deleted the addition in case of RG Faith Creation Pvt Ltd vs. DCIT [ITA 2615/AHD/2017] and in case of ACIT vs. Torrent Power Ltd. [I.T.A. No.1668/Ahd/2012].

Conclusions: Where assessee had its surplus fund against which minor investment was made, no question of making any disallowance of expenditure in respect of interest and administrative expenses under section 14A arose and therefore, there was no question of any estimation of expenditure in respect of interest and administrative expenses under rule 8D; SLP filed against said decision dismissed.

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