Interest incurred exclusively for business purpose cannot be subject to disallowance u/s 14A – Allahabad HC

ACIT vs. Dhampur Sugar Mill Pvt. Ltd (ITA No 220 of 2014 dated 05.11.2014) (Allahabad High Court) 


The assessee is engaged in the business of the manufacture and sale of sugar, chemicals and power, and has a distillery. For the FY 2007-08, the assessee had incurred interest on working capital which was debited to P&L A/c. During the course of assessment proceedings, the AO observed that assessee had invested some of its funds in shares and the dividend income which had been or was receivable on these investments did not form part of the total income. Holding that certain expenses, such as on account of interest, were directly attributable to the exempt income, the AO made disallowance of Rs 67.75 lakhs under section 14A.  

Appeal before CIT(A)

  • The CIT(A) observed that certain shares were acquired in 1993 out of the own funds of the assessee. The assessee had submitted evidence for the source of investment made by its promoters before the AO.
  • The term loans on which interest was paid during the year under consideration were received for specific purposes and the cash credit account was used for the working capital of the business. 
  • Hence, it was held that a disallowance under Section 14A read with Rule 8D of the Rules could not be justified.
  • There was no material which would establish that the investment in shares was made out of interest bearing funds but that it was made from fresh share capital raised in the period under consideration. 

ITAT’s ruling

  • The findings of the Commissioner (Appeals) were not controverted on behalf of the revenue. 
  • Once it was duly established that no borrowed funds on which interest was paid had been invested for earning tax free income, no disallowance was permissible under Section 14A
  • The Tribunal has observed that under Rule 8D(2)(ii), a proportionate disallowance out of interest expenditure would be made in respect of interest expenditure which is not directly attributable to any particular income or receipt
  • Since the entire interest expenditure, in the present case, was attributable to business in which the resultant income was assessable to tax, a disallowance could not be made

Allahabad High Court ruling

  • We have no reason to differ with the view which has been taken by the Commissioner (Appeals) and which has now been affirmed by the Tribunal
  • Under sub-section (1) of Section 14A, no deduction can be allowed in respect of expenditure incurred by the assessee in relation to income which does not form a part of total income under the Act. Sub- section (2) of Section 14A enables the Assessing Officer to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act in accordance with the method as prescribed under the Rules, if the Assessing Officer is not satisfied with the correctness of the claim of the assessee. 
  • In the present case, the specific finding of the Tribunal is that as regards the disallowance of Rs 67.75 lacs which was made under Section 14A by the Assessing Officer, the interest expenditure was attributable to the business of which the income was assessable to tax. 
  • Once this be the position, the view of the Tribunal is consistent with the provisions of Section 14A and does not warrant any interference.

Other issue:

Expenditure incurred by assessee on laying of power transmission lines which upon erection, would constitute the exclusive property of another party, would be revenue in nature since same was incurred to facilitate assessee’s own business and fixed capital of the assessee was untouched.

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