Godrej Agrovet Ltd vs. ACIT (ITAT Mumbai)

DATE: (Date of pronouncement)
DATE: December 2, 2010 (Date of publication)

Click here to download the judgement (godrej_agrovet_14A_shares_borrowed_funds_interest.pdf)

No s. 14A disallowance of interest on borrowed funds on basis that assessee ought to have used own funds to repay loans & not invest in shares

The assessee earned dividend of Rs. 3 crores which was exempt u/s 10(34). As the assessee had borrowings of Rs. 31.98 crores out of total funds of Rs. 96.18 crores and investments in shares of Rs. 30.42 crores, the AO held that the interest on the borrowings had to be disallowed on a pro-rata basis u/s 14A. The AO held that the assessee ought to have used the surplus funds to repay the loans instead of investing in shares and that it was an indirect case of diversion of borrowed funds for investment in shares. This was upheld by the CIT(A). On appeal by the assessee, HELD allowing the appeal:

In view of Godrej Boyce Mfg Co 328 ITR 81 (Bom) Rule 8D is applicable only prospectively i.e. from AY 2008-09 and not for earlier years. The facts showed that the assessee had made the investment in shares out of its own funds and the borrowed funds were entirely utilized for the purpose of its business. The investment in shares in the current year was made from a separate bank account where the surplus funds generated in that year were deposited. The argument that the assessee could have utilized its surplus funds in repaying the borrowings instead of investing in shares and by not doing so, there was diversion of borrowed funds towards investment in shares to earn dividend income is not acceptable in view of CIT vs. Hero Cycles Ltd 323 ITR 518 where it was held, distinguishing Abhishek Industries 286 ITR 1 (P&H), that if investment in shares is made by an assessee out of own funds and not out of borrowed funds, disallowance u/s 14A is not sustainable. Accordingly, the disallowance of interest on borrowed funds was deleted.

See Also: CIT vs. Reliance Utilities 313 ITR 340 (Bom) (where it was held that a presumption could be drawn that investment for non-business purposes had come out of own funds), CIT vs. Leena Ramachandran (where it was held that s. 14A applies where shares are held as investment and the only benefit derived is dividend). See Also S. 14A & Rule 8D: A comprehensive analysis by Shri. K. C. Singhal, VP, ITAT, (Retd).

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