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Facts
The assessee, Meghalaya Energy Corporation Limited GPF Trust, appealed against the order of the CIT(A) which confirmed the disallowance of interest expenditure paid to the members of the GPF Trust. The disallowance was made on the ground that there was no nexus between the interest expenditure and the income earned.
Held
The Tribunal held that the issue was squarely covered by a co-ordinate bench's decision in the assessee's own case for a prior assessment year, where similar interest expenditure was allowed. Following this precedent, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the addition.
Key Issues
Whether interest expenditure paid by a GPF Trust to its members is allowable when the Revenue claims there is no nexus with income earned.
Sections Cited
14A
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Income Tax Appellate Tribunal, GAUHATI BENCH, GUWAHATI
Before: SHRIDUVVURU RL REDDY, VP & SHRI RAJESH KUMAR, AM
This is an appeal preferred by the assessee against the order of the National Faceless Appeal Centre, Delhi (hereinafter referred to as the “Ld. CIT(A)”] dated 26.06.2025 for the AY 2017-18.
The only issue raised by the assessee is against the order of ld. CIT (A) confirming the order of ld. AO wherein the interest expenditure paid to the members of the appellant GPF Trust amounting to ₹7,38,47,533/- was disallowed and added to the income of the assessee by the ld. AO on the ground that there is no nexus between the interest expenditure and income earned which was affirmed by the ld. CIT(A).
The ld. DR on the other hand candidly agreed that the issue has been decided by the co-ordinate Bench in the year 2016-17, however, relied heavily on the order of ld. lower authorities.
After hearing the rival contentions and perusing the materials available on record, we find that the issue is squarely covered by the decision of the co-ordinate bench in own case in which the interest expenditure paid to the members of the GPF Trust was allowed by observing and holding as under:-
“10.2. Ground no. 2 relates to disallowance of interest expenditure at Rs. 6,42,82,320/-. We notice that the assessee has claimed the expenditure towards accrued interest on G.P.F. subscriptions at Rs. 6,91,33,739/-. Ld. AO firstly computed the disallowance u/s 14A of the Act at Rs. 3,67,13,164/- and thereafter, while dealing with the interest expenditure came to a conclusion that the said expenditures are not allowable as the assessee did not have any business which generated any revenue. But while computing the disallowance, reduced the disallowance made u/s 14A of the Act and confirmed the remaining amount as the interest disallowed as having no direct nexus to income at Rs. 3,24,20,575/-. When the issue came before ld. CIT(A), he, on one hand, reduced the disallowance u/s 14A of the Act to the extent of the exempt income but enhanced the interest disallowance to Rs. 6,42,82,320/-. The basis of disallowance by the Revenue authority is that there is no nexus between the interest expenditure and the income earned thereon. We, however, fail to find any merit in such finding of the Revenue authorities because the assessee is a G.P.F. Trust and is an association of persons. Source of funds are from the subscriptions collected from its employees on account of provident fund. These funds are invested for earning income and part of such funds are given as loan and advance to the holding company. One cannot question the fact that there is no nexus between the funds received and the funds applied towards investments. Therefore, outrightly the disallowance of the total interest expenditure is uncalled for Ad. Counsel for the assessee also raised an issue that no show cause notice was issued to the assessee before the enhancement of the
In the result, the appeal of the assessee is allowed.
Order pronounced on 13.03.2026.