Whether if it is proved that interest paid on borrowed capital was directly attributable to acquisition of business, it can still be assumed that loan was for acquisition of mutual funds also - NO: HC

THE issue before the Bench is - Whether if it is proved that interest paid on borrowed capital was directly attributable to acquisition of business, it can still be assumed that loan was for acquisition of mutual funds also. NO is the answer.

Facts of the case

The assessee company is a multi cable operator engaged in the distribution of analog and digital cable television services. Assessee had declared income against two heads reported as short terms capital gain of Rs.1.18 crores and income from other sources to the tune of Rs.31 lakhs. The total income was about Rs.1.5 crores. The other claim of loss was in excess of that amount. The assessee's return and books reveals accrual of tax income exemption of Rs.25 lakhs. The AO applied Rule 8D and directed an addition of Rs.75 lakhs (or about 300% of its exemption income earned). CIT (Appeal) granted partial review and confirmed approximately 50% of the addition under Section 14A made by way of disallowance. On further appeal, the ITAT was significantly influenced by the fact that the assessee had not applied any borrowed fund towards the investment that yield exemption income. In these circumstances, it set aside the CIT (Appeal)'s order.
Held that,

++ the AO's initially determined disallowance to the extent of Rs.75,41,105/- as against the tax exemption income earned by the assessee of Rs.25,77,300/-, was finally incorrect and excessive. It is based on misapplication of Rule 8D(2)(ii). The CIT(Appeal), to certain extent dealt with that misapplication but the fact remains that the tax exempt income of Rs.25 lakhs was in effect brought to tax by disallowance of Rs. 37 lakhs. Moreover, the relevant component of the expenditure was on account of the interest paid by the assessee. The ITAT after examining the records has returned a clear finding that no interest element could be attributed to the earning of exempt income. In these circumstances, the Court sees no reason to interfere with the ITAT's order. No substantial question of law arises. The appeal is dismissed in the above terms