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| DATE: | January 7, 2011 (Date of publication) |
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| Click here to download the judgement (maharashtra_seamless_14A.pdf) |
No s. 14A disallowance of interest on borrowed funds if AO does not show nexus between borrowed funds & tax-free investment
The assessee earned tax free income of Rs. 57.98 lakhs while it incurred interest expenditure of Rs. 1.36 crores. The AO took the view that the assessee ought to have used the money invested in tax-free bonds in its business and saved interest expenditure. He accordingly disallowed interest of Rs. 16.65 lakhs on a pro-rata basis by invoking s. 14A. The CIT(A) deleted the disallowance on the ground that the AO had not established any nexus between the borrowed funds and the investments in the tax free bonds and that as the assessee had own funds of Rs. 203 crores, the investment in the tax-free bonds could be considered to be made from own funds and not from borrowed funds. On appeal by the department, HELD dismissing the appeal:
(i) As the funds were mixed, it is not possible to ascertain whether the investment in tax free bonds is out of the assessee’s own funds. The source of investment in the tax free bonds was not identified. The AO did not establish any nexus between the borrowed funds and the investments in the tax free bonds. The cash flow of the assessee was not seen. Therefore, the apportionment on a pro rata basis was improper in the absence of anything brought by the AO to rebut the assessee’s stand that the investment in the tax free bonds had been made out of the funds of own funds (Minda Investments, Hero Cycles 323 ITR 518 (P&H) and Winsome Textile Industries 319 ITR 204 (P&H) followed);
(ii) The argument of the AO that the assessee should have invested in its business and saved interest expenditure and not invested in tax-free bonds is far-fetched as it is for the assessee to decide how he is going to use his own funds. The assessee is entitled to take its own decision and to carry on the business with more of borrowed funds rather than using its own funds. In that case, it cannot be said that interest expenditure is not expenditure for purpose of business and can be disallowed (H.R. Sugar Factory 187 ITR 363 (All) & India Metals & Ferro Alloys Ltd 193 ITR 344 (Ori) distinguished).
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