Surplus funds used for making tax free investments: Applicability of section 14A
- The Assessee earned exempt income of Rs.4.19 crores during the previous year under consideration. The Assessee did not make any disallowance under section 14A of the Act. When questioned, the Assessee submitted that the majority of its investments were made in the earlier years and further the loans taken during the year under consideration were used for general business purposes. The Assessing Officer did not agree with the contentions of the Assessee and accordingly, proceeded to make disallowance under section 14A of the Act read with rule 8D of Income Tax Rules. Accordingly, he made disallowance under section 14A of the Act.
- It was contended by the Assessee that investments made during the year were funded out of interest free funds provided by group concerns. It was further submitted that the Assessee had used interest free funds only for making investments and hence, no disallowance out of interest expenditure was called for.
- The Tribunal held that if the interest free funds available with the assessee are more than the value of investments, then the presumption is that the assessee had used interest free funds for making investments. This view is supported by the decision rendered by Hon’ble Supreme Court in the case of Reliance Industries Ltd. There should not be any dispute that, if the assessee is able to demonstrate that the interest free funds available with the assessee is more than the value of investments and further the loan funds have not been used to make the investments, then no disallowance out of interest expenditure is called for under rule 8D(2)(ii).
- However, since the factual details relating to the issue required examination, the Tribunal held that in the view that the Assessee, in the interest of natural justice, should be provided with an opportunity to present its case to the Assessing Officer.