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Interest expenditure was not disallowed under Section 14A because the taxpayer
had sufficie...
It is pertinent to note that the Delhi Bench of the Income-tax
3
Appellate Tribunal in the case of Escorts Ltd has held th...
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Interest expenditure was not disallowed under Section 14A because the taxpayer had sufficient own funds available for investment

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Disallowance under Section 14A of the Income-tax Act, 1961 (the Act) of interest expenditure related to exempt income has been a subject matter of litigation before the Courts. Recently, the Gujarat High Court in the case of Gujarat Narmada Valley Fertilizers Co Ltd. (the taxpayer), dealt with this issue and held that interest expenditure was not disallowed under Section 14A because the taxpayer had sufficient own funds available for investment.

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Transcript of "Interest expenditure was not disallowed under Section 14A because the taxpayer had sufficient own funds available for investment"

  1. 1. KPMG FLASH NEWS KPMG IN INDIA Interest expenditure was not disallowed under Section 14A because the taxpayer had sufficient own funds available for investment 23 January 2014 Disallowance under Section 14A of the Income-tax Act, 1961 (the Act) of interest expenditure related to exempt income has been a subject matter of litigation before the Courts. Recently, the Gujarat High Court (the High Court) 1 in the case of Gujarat Narmada Valley Fertilizers Co Ltd. (the taxpayer), dealt with this issue and held as follows:  The High Court relied on its own decision in the case of Gujarat State Fertilizers & Chemicals 2 Limited , where it was held that: - - The appellate authorities have also noted that the dividend income was earned out of the investments made in the earlier years and there was no investment made in the years under consideration. The Tribunal correctly set aside the Assessing Officer’s (AO) order since it was clear from record that the taxpayer’s own funds were higher than the investment made by it and with nothing to indicate that the borrowed funds were utilised for the purpose of investment in shares and for earning dividends. When the very basis for applying Section 14A of the Act on factual matrix is lacking, the disallowance to the extent of 10 percent of dividend income was not permissible. The appellate authorities have observed that the balance sheet of the taxpayer clearly reflects that the interest free funds available were much larger as compared to the investment.    With the availability of huge interest free funds in the form of share capital, reserves, etc., the Assessing Officer (AO) had not correctly applied the provisions of law to the issue. _________________ 1 CIT v. Gujarat Narmada Valley Fertilizers Co Ltd. (Tax Appeal No. 1151 of 2013) (Guj)  Accordingly, the High Court deleted the disallowance made by the AO under Section 14A of the Act. ____________ 2 CIT v. Gujarat State Fertilizers & Chemicals Ltd. (Tax Appeal No. 82 of 2013) (Guj) © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  2. 2. It is pertinent to note that the Delhi Bench of the Income-tax 3 Appellate Tribunal in the case of Escorts Ltd has held that investments pre-dominantly made in the earlier years would not attract disallowance of interest under Section 14A of the Act. However, the Bombay High Court in the case of Godrej & 4 Boyce Mfg. Co , held that in case investments were made out of mixed funds, where there is no direct nexus with the funds utilised, and sufficient interest free owned funds are available, the presumption that investments are made out of such owned funds may not be possible. Accordingly, the expenditure needs to be disallowed by applying Rule 8D of the Income-tax Rules, 1962. The Gujarat High Court in this decision has held that interest expenditure cannot be disallowed under Section 14A as the taxpayer had sufficient own funds available for investment. However, the Gujarat High Court did not refer to the above mentioned Bombay High Court decision in the case of Godrej & Boyce Mfg. Co. _________________ 3 4 Escorts Ltd v. ACIT [2007] 104 ITD 427 (Del) Godrej & Boyce Mfg. Co. Ltd. v. DCIT [2010] 328 ITR 81 (Bom) © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
  3. 3. www.kpmg.com/in Ahmedabad Commerce House V, 9th Floor, 902 & 903,Near Vodafone House,Corporate Road, Prahlad Nagar, Ahmedabad – 380 051 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. © 2014 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International The KPMG name, logo and “cutting through complexity“ are registered Cooperative (“KPMG International”), a Swiss entity. All rights reserved. trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

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