Kumar Urban Development Ltd vs ITO
The Assessing Officer observed that the assessee did not offer proper disallowance and computed the amount disallowable, the differential amount was disallowed . On the other hand, the assessee suo moto offered disallowance of Rs.12.26 crore u/s.14A r.w. Rule 8D. The difference of Rs.71,18,316/- emanated on account of the fact that the assessee did not consider share application money at the year-end as investment yielding exempt income, which the AO took it otherwise.
The Hon’ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. has held that where an assessee possessed sufficient interest free funds of its own generated in the course of relevant FY, apart from substantial shareholders’ funds, presumption gets established that the investments in sister concerns were made by the assessee out of interest free funds and, therefore, no part of interest on borrowings can be disallowed on basis that the investments were made out of interest bearing funds. The ld.CIT(A) observed that the assessee exhausted the shareholders fund in avoiding disallowance. However, utilization of shareholders funds for the purposes of avoiding disallowance has not been claimed. It is evident that the amount of shareholders fund available with the assessee at the beginning of the year was not claimed to have been utilized doubly by the assessee u/s.14A or u/s.36(1)(iii). As the assessee has taken benefit of the ratio of Reliance Utilities and Power Ltd., in respect of allowance of interest u/s.36(1)(iii) only, it was held that the addition cannot be sustained and is to be deleted . In the result, the appeal is partly allowed.