CHAMPALAL SURENDRA SARDA (HUF),CHENNAI vs. ACIT, CHENNAI

This appeal by the assessee is directed against the order passed by the Ld. Commissioner of Income Tax (Appeals)-13, Chennai dated 25.01.2017 in for the assessment year 2012-13 passed u/s.250(6) r.w.s.143(3) of the Act.

The assessee has raised several grounds in its appeal, however the crux of the issue is that the Ld.CIT has erred in sustaining the addition made by the Ld.AO for Rs.11,64,278/- invoking the provisions of Section 14A of the Act read with Rule 8D. carrying on the business of wholesale trading in textiles. Initially the return was procession U/s.143(1) of the Act and subsequently the case was selected under CASS and assessment was finally framed U/s.143(3) of the Act on 26.03.2015, wherein the Ld.AO invoked the provisions of Section 14A of the Act and disallowed the interest expenditure amounting to Rs.11,64,278/-, out of the aggregate claim of Rs.36,32,296/- as interest expenditure during the relevant assessment year. On appeal the Ld.CIT(A) confirmed the order of the Ld.AO by relying on various decisions.

At the outset the Ld.AR submitted before us that the assessee’s capital was Rs.3.89 crores out of which investment of Rs.2.26 crores was made for earning tax free income. It was therefore argued that the interest expense incurred by the assessee cannot be attributed towards the investment made for Rs.2.26 crores because the entire amount of investment of Rs.2.26 crores flowed from the capital of the assessee which is interest free fund. The Ld.DR on the other hand relied on the orders of the Revenue authorities.

Having heard both the parties, we find merit in the submission of the Ld.AR. When the assessee had made investment of Rs.2.26 crores out of its interest free funds ie., from the assessee’s own capital of Rs.3.89 crores, no interest expenses can be attributable towards such investments. The assessee is at liberty to deal with its interest free funds in whatsoever manner it decides and deploy its interest bearing funds for business purposes. The interest expenses arising out of borrowed funds which is assigned in the business of the assessee is allowable as deduction as per the provisions of the Act. Further the fact that the assessee’s capital of Rs.3.89 crores and the investment of Rs.2.26 crores is not in dispute. Therefore in the case of the assessee provisions of Section 14A will not be applicable because the investments are made from non-interest bearing fund and no expense can be attributable for making such investment. Further the Ld.A.O has not pointed out any other expense towards the investment made by the assessee for Rs.2,26 crores. Therefore, we are of the view that in the case of the assessee provisions of section 14A of the Act will not be applicable.