If Assessing Officer fails to demonstrate link between tax-free investment and borrowed funds, no disallowance u/s 14A of interest expenditure

If Assessing Officer  fails to demonstrate link between tax-free investment and borrowed funds, no disallowance u/s 14A of interest expenditure

This was held in CIT vs. K. Raheja Corporation Pvt Ltd (Bombay High Court) – advocate for the Revenue could not show as to how interest on borrowed funds to the extent of Rs.2.79 crores was ascribable to earning dividend income which are not liable under Section 10(33) of the Act (as it then stood). Hence, in the facts of the present case, for want of any material or basis to hold that the interest expenditure directly or indirectly was ascribable for earning the dividend income, the decision of the Income Tax Appellate Tribunal in deleting the dis­allowance of interest made under Section 14A of the Act cannot be faulted

It was the opinion of the Income Tax Appellate Tribunal that the investments in mutual funds and equity shares were made by the assessee during the assessment years 1994­-95 till 1998-­99 and it has been time after time held by the Income Tax Appellate Tribunal that these investments have been made out of the assessee’s own funds and not out of the borrowed funds. Even the investments made in the assessment year 1999­-2000 have been held by the Income Tax Appellate tribunal to be out of assessee’s own funds and not out of borrowed funds by its order dated 24^th June 2011.

It is to be noted that in this case, Section 14A was not on the statute book when the Income Tax Appellate Tribunal passed orders in the assessment years prior to the assessment year in question.