13 Section 14A – Assessee having furnished details showing that its own funds were sufficient to cover the investments in shares and securities, no disallowance u/s. 14A was called for, more so when no objective satisfaction was recorded by AO before invoking the provisions of section 14A

FACTS

–   During the A.Y. 2008-09,
assessee earned an exempt dividend income of Rs.15.68 crore from investments in
shares and securities. The company had also made long term capital gain of
Rs.51.22 crore on sale of equity shares and equity oriented mutual funds. The
dividend income and long term capital gains had been claimed as exempt from
income tax u/s. 10(34) and 10(38) of the Act respectively.

–   The AO held that assessee
had incurred interest expenditure and had not given exact details of the
sources of the investments in shares and mutual funds. The AO concluded that it
could not be ruled out that part of the interest incurred had a proximate
connection with the investments in tax free securities. Therefore, the AO made
the disallowance u/s. 14A.

–   This disallowance was
contested in an appeal before CIT(A) who upheld the disallowance.

–  Before the Tribunal, it was
contended that the assessee did not have any borrowings till 31-03-2006 as per
the audited balance sheet. The assessee had surplus own fund which could be
verified from the balance sheet. The comparative chart of assessee’s own funds
vis-à-vis investments right from 31-3-2006 to 31-3-2008 showed that the
assessee had sufficient interest free own funds to make investments in tax free
income yielding securities. 

HELD

–  The Tribunal noted that the
assessee had produced the chart showing the summary of source and application
of funds before the Assessing Officer. The assessee had replied to show cause
notice issued by the Assessing Officer and furnished details that its own funds
over the years were sufficient to cover the investments in the shares and
securities yielding exempt income.

–   The borrowings of the
assessee-company were utilised for other business requirements and not for
making investments. The entire interest expenditure incurred on borrowing fund
had been offered to tax.

–   No objective satisfaction
had been recorded by the Assessing Officer before invoking the provisions of
section 14A. It was necessary for the Assessing Officer to give opportunity to
the assessee to show cause as to why Rule 8D should not be invoked. Assessee
had placed on record all the relevant facts and it had also given the detailed
working of the disallowance voluntarily made for earning the exempt income in
the return of income.

–  The assessee had claimed
that it had sufficient funds to cover investments in tax free securities, which
fact was established by the financial audited report for various assessment
years. The AO had also recorded that assessee’s own funds were far more than
the investments in shares and securities yielding tax free income.

–  The Tribunal directed AO to
delete the disallowance made u/s. 14A.