INCOME TAX ACT, 1961

section 14A

Disallowance under section 14A - Expenditure incurred against earning of exempted income - Assessee having sufficient interest free funds available with it -

Assessee had made huge investments and earned dividend which was claimed as exempt income. However, no suo moto disallowance was made by assessee for earning exempt income. Assessee debited interest expenditure on account of interest payment on loans. AO doubted the same and therefore, he issued show cause notice to explain as to why provisions of section 14A read with rule 8D would not be applicable in the case of the assessee. Assessee explained that investment was made out of own funds and therefore, there would no reason to make disallowance of expenditure and application of the impugned provisions. AO did not accept the explanation of the assessee, and made disallowance under section 14A read with rule 8D. Held: CIT(A) had recorded a finding that investment in shares against which the assessee had share capital and reserves and surplus and therefore, assessee had sufficient interest-free funds available with it for making this much investment. Department could not show that the amount of investment made by the assessee in those investments, which earned tax-free income, was higher than the amount of share capital and free reserve available with the assessee, nor could show that borrowed funds were utilised so as to invoke the provisions of section 14A. Therefore, AO was directed to delete the disallowance on account on interest expenditure.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2015-16

INCOME TAX ACT, 1961

Section 14A

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