Income tax - Sec 14 - Whether when assessee's own funds get mixed with interest-bearing funds, onus lies on AO to establish nexus between investments made in tax-free bonds and interest-bearing funds - Yes, says ITAT
MUMBAI, JAN 21, 2011: THE issue before the Tribunal is - Whether when assessee's own funds get mixed with the interest-bearing funds, onus falls on AO to establish a nexus between the investment in tax free bonds and interest bearing funds and whether AO is right to invoke powers u/s 14 without establishing such a nexus. And the verdict goes against the Revenue.
Facts of the case
During the assessment proceedings, the AO observed that the assessee had earned tax free income of Rs.57, 98,695/- and, at the same time, it incurred interest expenditure of Rs.1, 36,41,749/-; that the assessee would have saved interest expenditure, if the money invested in the interest bearing bonds had been utilized for normal business purposes other than investments; and that, however, the assessee's claim of having share holders' fund of Rs.203.17 crores could also not be ignored. The AO, as such, disallowed interest of Rs.16,65,919/- on a pro-rata basis, invoking the provisions of section 14A of the I.T. Ac. CIT(A) allowed the claim of the assessee.
After hearing the parties the ITAT held that,
++ the CIT(A), while deleting the disallowance, has observed, that the assessee had maintained that the interest expenditure in question was incurred in respect of the borrowing on cash credit limits utilized for normal business purposes of the assessee; that no part of the borrowed funds had been utilized by the assessee for making investment in the tax free bonds; that Rs.17 crores had been invested in the tax free bonds out of the assessee's own funds of Rs.203.17 crores, as available with the assessee, as per the assessee's balance sheet; that there were borrowings to the tune of Rs.57.2 crores; that, however, the funds were mixed and it was not possible to ascertain as to whether the investment in the tax free bonds was out of the assessee's own funds or from borrowed funds; that this could only have been ascertained, if the cash flow of the assessee had been examined, and the source of investment in the tax free bonds clearly identified, which had not been done by the AO; that the AO had not established any nexus between the borrowed funds and the investments in the tax free bonds ; and that therefore, apportionment on a pro-rata basis was not proper. Nothing has been brought on record to counter the assessee's contention that the investment in the tax free bonds had been made out of the share holders' funds;
++ there is no error in the order of the CIT(A). It remains undisputed that the funds are mixed and it is not possible to ascertain as to whether the investment in the tax free bonds was 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 ld. CIT(A) is correct in opining that 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 the share holders of the AO.
Revenue's appeal dismissed
MUMBAI, JAN 21, 2011: THE issue before the Tribunal is - Whether when assessee's own funds get mixed with the interest-bearing funds, onus falls on AO to establish a nexus between the investment in tax free bonds and interest bearing funds and whether AO is right to invoke powers u/s 14 without establishing such a nexus. And the verdict goes against the Revenue.
Facts of the case
During the assessment proceedings, the AO observed that the assessee had earned tax free income of Rs.57, 98,695/- and, at the same time, it incurred interest expenditure of Rs.1, 36,41,749/-; that the assessee would have saved interest expenditure, if the money invested in the interest bearing bonds had been utilized for normal business purposes other than investments; and that, however, the assessee's claim of having share holders' fund of Rs.203.17 crores could also not be ignored. The AO, as such, disallowed interest of Rs.16,65,919/- on a pro-rata basis, invoking the provisions of section 14A of the I.T. Ac. CIT(A) allowed the claim of the assessee.
After hearing the parties the ITAT held that,
++ the CIT(A), while deleting the disallowance, has observed, that the assessee had maintained that the interest expenditure in question was incurred in respect of the borrowing on cash credit limits utilized for normal business purposes of the assessee; that no part of the borrowed funds had been utilized by the assessee for making investment in the tax free bonds; that Rs.17 crores had been invested in the tax free bonds out of the assessee's own funds of Rs.203.17 crores, as available with the assessee, as per the assessee's balance sheet; that there were borrowings to the tune of Rs.57.2 crores; that, however, the funds were mixed and it was not possible to ascertain as to whether the investment in the tax free bonds was out of the assessee's own funds or from borrowed funds; that this could only have been ascertained, if the cash flow of the assessee had been examined, and the source of investment in the tax free bonds clearly identified, which had not been done by the AO; that the AO had not established any nexus between the borrowed funds and the investments in the tax free bonds ; and that therefore, apportionment on a pro-rata basis was not proper. Nothing has been brought on record to counter the assessee's contention that the investment in the tax free bonds had been made out of the share holders' funds;
++ there is no error in the order of the CIT(A). It remains undisputed that the funds are mixed and it is not possible to ascertain as to whether the investment in the tax free bonds was 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 ld. CIT(A) is correct in opining that 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 the share holders of the AO.
Revenue's appeal dismissed
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