Availability Of Interest-Free Surplus Fund To Make Investment: Bombay High Court Deletes Addition On Interest Expenditure

The Bombay High Court has upheld the CIT’s order in deleting the addition made on account of interest expenditure as the assessee, Godrej & Boyce, had sufficient interest-free surplus funds to make the investment.

The division bench of Justice Dhiraj Singh Thakur and Justice Kamal Khata has observed that the AO has neither examined the claim in respect of expenditure incurred in relation to the exempt income of the assessee nor recorded any satisfaction with regard to the correctness of the assessee’s claim with reference to the books of account. The disallowance made by applying Rule 8D is not only against the statutory mandate but also contrary to the legal principles laid down.

The respondent/assessee filed its income tax return, declaring total income under normal provisions and book profit under Section 115JB of the Income Tax Act.

The return was processed. The case was selected for scrutiny, and a notice was issued to the assessee. The AO made various additions/disallowances, which include disallowances u/s. 14A r.w. Rule 8D and amount to Rs.5,11,85,000/- The AO completed its assessment.

The appellant submitted that the AO had clearly mentioned that setting off interest costs of dividend income against other taxable income is against the matching concept of income and expenditure. There was no need to rely on any presumption of own funds on account of the changed law that came into force in 2007–08, followed by the introduction of Rule 8D in 2008–09, which provides for a method of calculation.

The appellant submitted that the ITAT erred in endorsing CIT(A)’s order, which raised the presumption of owning interest-free funds. The ITAT ought not to have deleted the addition of interest disallowed by the AO in the absence of any evidence that indicated that borrowed funds were not used for the purpose of making investments that yielded exemption. The ITAT should not have considered interest when calculating disallowance under Section 14A read with Rule 5D because the assessee did not keep a separate account for the investment related to exempt income.

The respondent contended that, in respect of payments made out of a mixed fund, it is the assessee who has such a right of appropriation and also the right to assert from what part of the fund a particular investment is made, and it may not be permissible for the department to make an estimation of a proportionate figure.

The court held that the ITAT had rightly deleted the disallowance made by the AO. Consequently, the interest expenditure cannot be disallowed under Section 14A r.w. Rule 8D(2)(ii) under any circumstances.

Case Title: Pr. Commissioner of Income-Tax Versus Godrej & Boyce Mfg. Co. Ltd.

Case No.: ITA 1029 Of 2018

Citation: 2023 LiveLaw (Bom) 113

Date: 20.02.2023

Counsel For Appellant: Suresh Kumar

Counsel For Respondent: P. J. Pardiwalla

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