S.14A Important Judgements

Minda Investments vs. DCIT (ITAT Delhi)

Godrej Agrovet Ltd vs. ACIT (ITAT Mumbai)

No s. 14A disallowance of interest on borrowed funds on basis that assessee ought to have used own funds to repay loans & not invest in shares

The assessee earned dividend of Rs. 3 crores which was exempt u/s 10(34). As the assessee had borrowings of Rs. 31.98 crores out of total funds of Rs. 96.18 crores and investments in shares of Rs. 30.42 crores, the AO held that the interest on the borrowings had to be disallowed on a pro-rata basis u/s 14A. The AO held that the assessee ought to have used the surplus funds to repay the loans instead of investing in shares and that it was an indirect case of diversion of borrowed funds for investment in shares. This was upheld by the CIT(A). On appeal by the assessee, HELD allowing the appeal:

In view of Godrej Boyce Mfg Co 328 ITR 81 (Bom) Rule 8D is applicable only prospectively i.e. from AY 2008-09 and not for earlier years. The facts showed that the assessee had made the investment in shares out of its own funds and the borrowed funds were entirely utilized for the purpose of its business. The investment in shares in the current year was made from a separate bank account where the surplus funds generated in that year were deposited. The argument that the assessee could have utilized its surplus funds in repaying the borrowings instead of investing in shares and by not doing so, there was diversion of borrowed funds towards investment in shares to earn dividend income is not acceptable in view of CIT vs. Hero Cycles Ltd 323 ITR 518 where it was held, distinguishing Abhishek Industries 286 ITR 1 (P&H), that if investment in shares is made by an assessee out of own funds and not out of borrowed funds, disallowance u/s 14A is not sustainable. Accordingly, the disallowance of interest on borrowed funds was deleted.

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CIT vs. Reliance Utilities (Bombay High Court)

Advances to sister concerns must be presumed to have come out of own funds and not borrowed funds.

Where the assessee had its own funds as well as borrowed funds and it advanced funds to its sister concerns for allegedly non-business purposes and the question arose whether the AO was justified in disallowing the interest on the borrowed funds on the ground that they had been used for non-business purposes, HELD:

Where an assessee has his own funds as well as borrowed funds, a presumption can be made that the advances for non-business purposes have been made out of the own funds and that the borrowed funds have not been used for this purpose. Accordingly, the disallowance of the interest on the borrowed funds is not justified.

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This are All Recent Case Laws  , Hope its of Utility to all of you!! Add More to make this Forum a One Stop S.14A Corner.

GOOD ONE....

Thanks Maulik

nice Case laws. will help in study further

:)
 

Nice cases and adding to the list.

CIT vs. Leena Ramachandran (Kerala High Court)

S. 14A applies where shares are held as investment and the only benefit derived is dividend. S. 36(1)(iii) deduction allowable if shares held as stock-in-trade

The assessee borrowed funds to acquire controlling interest shares in a company with which she claimed to have business dealings. The interest on the borrowings was claimed as a deduction u/s 36(1)(iii). The AO rejected the claim on the ground that the only benefit derived from the investment in shares was dividend and that the interest had to be disallowed u/s 14A. This was confirmed by the CIT (A). The Tribunal held that the deduction of interest was allowable u/s 36(1)(iii) in principle though a portion of the interest paid had to be regarded as attributable to the dividend and was disallowable u/s 14A. On appeal by the Revenue, HELD reversing the order of the Tribunal:

(i) The only benefit derived by the assessee from the investment in shares was the dividend income and no other benefit was derived from the company for the business carried on by it. As dividend is exempt u/s 10(33), the disallowance u/s 14A would apply. The Tribunal was not correct in estimating the s. 14A disallowance to a lesser figure than the interest paid on the borrowing when the whole of the borrowed funds were utilized by the assessee for purchase of shares;

(ii) Deduction of interest u/s 36(1)(iii) on borrowed funds utilized for the acquisition of shares is admissible only if shares are held as stock in trade and the assessee is engaged in trading in shares. So far as acquisition of shares in the form of investment is concerned and where the only benefit derived is dividend income which is not assessable under the Act, disallowance u/s 14A is squarely attracted.

Thanks Ankit for sharing such valuable info.....

Godrej Boyce Case Law

Rule 8D r.w. S. 14A (2) is not arbitrary or unreasonable but can be applied only if assessee’s method not satisfactory. Rule 8D is not retrospective and applies from AY 2008-09. For earlier years, disallowance has to be worked out on “reasonable basis� u/s 14A (1).

Link to Aditya Sir's Already Uploaded Case Law

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S. 14A & Rule 8D: A comprehensive analysis
By K.C.Singhal, Advocate

A very Enlightening Article By Shri KC Singhal , Discussing the Technicalities of S.14A & Rule 8D in light of Recent Case laws.

Courtesy : Itatonline.org

This type of work  is expected from CA Final Students. 

THANKS FOR SUCH VALUABLE POST.