Interest free advances are presumed to be from Interest free borrowing, subject to sufficiency, for disallowance u/s 14A: Bombay HC

Facts of the case:

  • Assessee during the year under consideration had interest-free and interest-bearing funds. Certain interest free advances were made by the assessee during the year under consideration.
  • Assessing Officer made addition u/s 14A of the Income Tax Act, 1961 (“the Act”) and also disallowed the interest paid on borrowed capital u/s 36(1)(iii) of the Act.
  • The first appellate authority deleted the above-mentioned additions and the tribunal upheld this decision. Assessing Officer filed an appeal before the High Court of Bombay against the decision of Tribunal.

Contention of Assessing Officer:

  • The main contention of the assessing officer is that the interest free advances were made out of interest-bearing funds and addition were to be made u/s 14A since no expenditure is allowed to be deducted if it relates to income which does not form part of total income under this Act.
  • Further, since the interest-bearing and interest-free borrowings were utilized for advancing interest free loans, the same should be disallowed u/s 36(1)(iii) of the Act.

Held by High Court of Bombay:

  • The Tribunal while affirming the order of first appellate authority observed that interest free fund available was far in excess of the interest free advances given.
  • The High Court while relying on the decision of this court in CIT vs Reliance Utilities & Power Ltd. [2009] 178 Taxman 135/313 ITR 340 wherein it was held that if there are funds available with the assessee, both interest free and interest bearing funds, then a presumption shall arise that the interest free advances are made from interest free funds, if the interest free funds are sufficient to meet the advances.
  • Since in the given case, sufficient interest free funds are available, it was held that the addition u/s 14A and u/s 36(1)(iii) shall not be made since the interest-bearing funds are not used for making interest free advances.

Conclusion:

The conclusion which can be driven from this case is that if interest free funds and interest-bearing funds are available then a presumption shall arise that investments are made from interest free funds provided that interest free funds are sufficient to meet the amount of investment.

Source: Principal Commissioner of Income-tax v. Shapoorji Pallonji & Co. Ltd [2020] 117 taxmann.com 625 (Bombay)