Whether disallowance of interest expenses u/s 14A read with 8D(2)(ii) can be made if own interest free funds are higher than investments?

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Whether disallowance of interest expenses u/s 14A read with 8D(2)(ii) can be made if own interest free funds are higher than investments?

Sri Vishnu Shankar Mill Ltd Vs ITO
Whether disallowance of interest expenses u/s 14A read with 8D(2)(ii) can be made if own interest free funds are higher than investments and presumption apply that own interest free funds has been used for making investments – NO : ITAT
Whether Section 14A read with Rule 8D(2) cannot be invoked for making disallowance u/s 115JB but disallowance of expenses incurred relatable to earning of an exempt income is to be computed in accordance with Explanation 1(f) to Section 115JB – YES : ITAT
– Case Remanded: CHENNAI ITAT
Whether disallowance of interest expenses u/s 14A read with 8D(2)(ii) can be made if own interest free funds are higher than investments and presumption apply that own interest free funds has been used for making investments – NO : ITAT
Whether Section 14A read with Rule 8D(2) cannot be invoked for making disallowance u/s 115JB but disallowance of expenses incurred relatable to earning of an exempt income is to be computed in accordance with Explanation 1(f) to Section 115JB – YES : ITAT
++ assessee has paid interest on borrowings during the year under consideration and disallowance of interest expenses was made to the tune of Rs.34.21 lakhs by invoking provisions of Sec.14A r.w.r. 8D(2)(ii) of the 1962 Rules. The assessee has brought on record cogent material to evidence that assessee has own interest free funds available to the tune of Rs. 19.75 as on 31.03.2014 consisting of share capital along with Reserves and Surpluses (preceding year 11.71 crores) and the assessee had investments of Rs. 8.34 Crs. as on 31.03.2014 while investments were to the tune of Rs.34.19 lakhs as on 31.03.2013. Further, assessee has sold an property for Rs.9.35 crores during the year under consideration. The assessee has filed bank statements and sale deed to evidence sale of property and investments made during the year under consideration. Allegations made by Revenue are that the assessee has used mixed funds for the purpose of making investments in the securities which are capable of yielding exempt income. The Revenue could not demonstrate co-relation between the utilization of interest bearing borrowed funds with the investments made. The assessee has demonstrated with cogent evidences that the assessee has its own interest free funds which are higher than investments and presumption will apply that assessee has invested its own interest free funds for making investments in the securities capable of yielding exempt income. The Revenue is not able to demolish/rebut this presumption. The Reliance is placed on decision of Bombay High Court in the case of Reliance Utilities and Power Limited. Thus, it was ordered to delete addition as were made by Revenue u/s 14A read with Rule 8D(2)(ii) of the 1962 Rules;
++ so far as additions made by Revenue u/s 14A of the 1961 Act read with Rule 8D(2)(iii) of the 1962 Rules are concerned it was noted that the assessee has to bring on record cogent evidences and explanations to substantiate the complete modus operandi adopted by the assessee for making investments such as involvement of Board of Directors, committee of investments /Personnel appointed to look after decision making process for investments, time spent by Board of Directors/ committee members or other personnel and cost attributable thereof , other cost incurred such as administrative costs and other costs in relation to these investments, etc., to explain and demonstrate entire cycle of investment making process to discharge primary onus, then the AO has to look into books of accounts to compute the disallowance of expenditure incurred in relation to earning of an exempt income and to record satisfaction. In the absence thereof of the discharge of primary onus by the assessee as , the AO will have right to invoke Rule 8D(2)(iii) of the 1962 Rules after recording satisfaction as mandated u/s 14A of the 1961 Act. Thus, the matter is remitted back to the file of the AO for fresh adjudication and the assessee is directed to produce relevant details /explanation and modus operandi of managing its investment portfolio. It was agreed that Section 14A read with Rule 8D(2) of the 1962 Rules cannot be invoked for making disallowance u/s 115JB of the 1961 Act but disallowance of expenses incurred relatable to earning of an exempt income is to be computed in accordance with Explanation 1(f) to Section 115JB of the 1961 Act, in accordance with ratio of decision of Special Bench in the case of Vireet Investment.
ITA No.577/Chny/2019
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