Section 14A

Section 14A : Disallowance of Expenditure incurred in relation to income exempt from tax

Background

Section 14A is a disallowance provision. This section provides that while computing the total income of any assessee, no deduction will be permitted in respect of any expense incurred in relation to any income which is exempt from income tax.

Position prior to the introduction of section 14A

Prior to the introduction of section 14A, the nature of the business was an important factor for determining the disallowance of expenditure incurred on earning exempt income. The businesses were broadly classified into two categories:

a composite and indivisible business; or
a divisible business

The settled law at the material time was that, when an assessee has a composite and indivisible business i.e. the business has elements of both taxable and non-taxable income, the entire expenditure in respect of the said business is deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply.

However, where the business was divisible, the principle of apportionment of the expenditure was applicable and the expenditure apportioned to the 'exempt' income or income not exigible to tax, was not allowable as a deduction.

Objective behind insertion of section 14A with retrospective effect

The basic principle of taxation is to tax the net income, i.e. gross income minus the expenditure and on the same analogy the exemption, if any, is also in respect of net income. In other words, where the gross income did not form part of total income, its associated or related expenditure also, could not be permitted to be debited against other taxable income.

The stated intention of the Parliament, while introducing section 14A, was that it should appear in the statute book, right from its inception that, expenditure incurred in connection with income, which does not form part of total income is not intended to be allowed as a deduction. By introducing this section retrospectively, the Parliament was only acting on this intention.

It can be said that the insertion of section 14A with retrospective effect reflects a serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income. It is understood that in the case of an income like dividend income which does not form part of the total income, any expenditure/deduction relatable to such (exempt or non-taxable) income, even if it is of the nature specified in sections 15 to 59 cannot be allowed against any other income which is includible in the total income.

Chronology of amendments

Amending Act/ Rule	Amendment	Impact
Finance Act, 2001	Section 14A inserted (w r e f 1-4-1962)	Provided for disallowance for expenses incurred in relation to income exempt from income tax
Finance Act, 2002	Proviso to section 14A inserted (w r e f 11-5-2001)	Clarification that section 14A cannot be used to reopen / rectify completed assessment
Finance Act, 2006	Sub-sections (2) and (3) inserted (w e f 1-4-2007)	Provided the methodology for computing the disallowance under section 14A
IT (Fifth Amendment) Rules, 2008	Rule 8D inserted (w e f 24-3-2008)	Prescribes the mechanics for allocating expenses to exempt income

Legislative history in brief

Allowance or disallowance of expenses incurred in relation to income / business which were exempt from the levy of tax had always been a source of controversy and a subject matter of dispute. The Government, with a view to put this controversy to rest, brought section 14A into the statute.

While making this amendment, the Government clarified that its intention, right since the inception of the Income-tax Act, was to give a deduction only for those expenses which would yield taxable income. Accordingly, section 14A was inserted into the statute by virtue of the Finance Act, 2001 with retrospective effect from 1-4-1962.

Given the far reaching consequences of the amendment, there were concerns that this amendment could also be used to re-open completed assessments, leading to apprehension about the potential for abuse. With a view to curb any potential abuse, the Government inserted a proviso (by virtue of the Finance Act, 2002), clarifying that nothing contained in section 14A would empower the Assessing Officer to either reassess under section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1-4-2001. This ensured that all the concluded assessment, pertaining to assessment years beginning on or before the 1-4-2001, would not be disturbed despite the retrospective impact of section 14A.

Sub-sections (2) and (3) of section 14A were introduced subsequently by virtue of the Finance Act, 2006, with effect from 1-4-2007. It is relevant to highlight that although sub-sections (2) and (3) had been introduced with effect from 1-4-2007, they remained inoperative due to technical reasons. A hurdle was created due to use of the expression 'such method as may be prescribed' by the legislature. The technical hitch was that, while sub-sections (2) and (3) to section 14A provided for computing the disallowance as per the method prescribed, the relevant method was still not incorporated into the Income tax Rules. It is at this juncture that, rule 8D was introduced [by virtue of the Income-tax (Fifth Amendment) Rules, 2008 notified by the Central Board of Direct Taxes by its notification No. 45/2008, dated 24-3-2008].

Initially there was some controversy whether rule 8D could be applied prior to 24-3-2008, however, it is now a widely accepted position that that the method prescribed under rule 8D applies prospectively.

Analysis of section 14A

Expenditure incurred in relation to income which does not form part of the total income [Section 14A(1)]

Sub-section (1) of section 14A stipulates that for the purposes of computing total income under Chapter IV (Computation of Total Income), no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the said Act.

It is relevant to highlight that while an emphasis has been laid on the expressions 'expenditure incurred' and 'in relation to', there have been many disputes as to whether these words are required to be interpreted literally or a purposive interpretation was required to be adopted. A literal interpretation would mean that the expenditure must have actually taken place and that to in relation to exempt income.

Relevance of the words ‘in relation to’

The need for a direct and proximate connection with the subject matter has been the central point of debate on the applicability of section 14A to certain specific instances. The judicial position in this regard is that, the expression 'in relation to' appearing in section 14A is not to be given a narrow or constricted meaning. The expression does not have any embedded object, it simply means 'in connection with' or 'pertaining to'.

Given the above, if the expenditure in question has a relation or connection with or pertains to exempt income, it is likely to be allowed as a deduction even if it otherwise qualifies under the other provisions of the said Act. Further, permissible deductions enumerated in sections 15 to 59 are likely to be allowed only with reference to income which is brought to tax under one of the heads of income.

Relevance of the word ‘expenditure incurred’

The need for incurring of actual expenditure for earning exempt income has also been a subject matter of dispute. The debate is whether the expression ‘expenditure incurred’ refers to actual expenditure and not to some imagined expenditure. The judicial position in this regard is that, the 'actual' expenditure that is in contemplation under section 14A(1) is the 'actual' expenditure in relation to or in connection with or pertaining to exempt income. The corollary to this is that if no expenditure is incurred in relation to the exempt income, no disallowance can be made under section 14A.

CBDT’s clarification regarding disallowance of expenses under section 14A in cases where corresponding exempt income has not been earned during the financial year

The CBDT vide its circular [No. 5 / 2014 dated 11-2-2014] has clarified that “by the usage of the term ‘includible’ in the heading to section 14A of the Act and also in the heading to Rule 8D of the I.T. Rules, 1962 which indicates that it is not that exempt income should necessarily be included in a particular year’s income, for the disallowance to be triggered. Also, section 14A of the Act does not use the word ‘income of the year’ but the ‘income under the Act’. This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration”. On this basis, the CBDT has clarified that Rule 8D and section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income.

Determination of expenditure incurred in relation to exempt income by the Assessing Officer [Section 14A(2)]

Sub-section (2) of section 14A provides the manner in which the amount of expenditure incurred in relation to exempt income is to be determined by the Assessing Officer. Sub section (2) provides that if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of assessee’s claim for the expenditure incurred in relation to exempt income, then in such a case the Assessing Officer has to determine the quantum of disallowance as per the method prescribed i.e. in accordance to Rule 8D of the Income tax Rules.

It is relevant to highlight that the provisions of this sub-section come into play only if the Assessing Officer records a finding that he is not satisfied with the correctness of the assessee’s claim for the expenditure incurred in relation to exempt income. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure.

Determination of expenditure incurred in relation to exempt income by the Assessing Officer when assessee claims that no expenditure has been incurred [Section 14A(3)]

Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to exempt income earned. A clear distinction is required to be made as when sub-section (2) is applied and the situations where sub-section (3) is to be applied.

While sub-section (2) applies to situations where in the assessee on his accord, asserts a claim that some expenditure has been incurred for the purpose of earning exempt income, sub-section (3) comes into play where the assessee asserts that no expenditure has been incurred for earning exempt income.

In both cases, the Assessing Officer has to record his satisfaction about the correctness of the assessee’s claim regarding the expenditure incurred or not incurred, as the case may be, to earn exempt income, before proceeding with his determination of the amount of expenditure in accordance rule 8D.

Thus, before rejecting the claim of the assessee, that some expenditure or no expenditure, as the case may be, is incurred in relation to exempt income earned, the Assessing Officer has to indicate cogent reasons for his rejection.

Prescribed method of determining the quantum of expenditure incurred for earning exempt income [Rule 8D]

This rule 8D comes into effect only when the Assessing Officer, having regard to the accounts of the assessee of a previous year, records his dissatisfaction about:

The correctness of the claim of expenditure made by the assessee; or
The claim made by the assessee that no expenditure has been incurred in relation to exempt

For this purpose, sub-rule (2) prescribed the method for computing the quantum of expenditure attributable to earning exempt income. Sub-rule (2) provides that the expenditure in relation to exempt income which shall be the aggregate of following amounts, namely:—

The amount of expenditure directly relating to exempt income;
In a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :—
A × B
C
Where A = Amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year;
B = The average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ;
C = The average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;
an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year.

As is apparent from the above, the method for determining the expenditure in relation to exempt income has three components.

The first component being the amount of expenditure directly relating to exempt income.
The second component being computed on the basis of the formula, applies to interest which is not directly attributable to any particular income or receipt or expenses which are common to the business as a whole. Essentially, the formula apportions the amount of interest expense incurred, for common purposes i.e. earning taxable as well as exempt income, during the previous year. The apportionment is in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee.
The third component is an artificial figure i.e. one half per cent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year.

In summary, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of rule 8D. The indirect expenditure is again split in two sub parts i.e. interest expenditure and other expenditure. In case of (indirect) interest, the disallowance is computed through the principle of apportionment, as indicated above. In cases other indirect expenditure, a rule of thumb figure of one half per cent of the average value of the investment, income from which does not or shall not form part of the total income, is taken.

It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under section 14A.

Summary of some of the leading judicial rulings on disallowance under section 14A

Citation	Key observations
Commissioner of Income-tax, Mumbai v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 192 TAXMAN 211 (SC)	The insertion of section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income. Section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A. For attracting section 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. In the absence of such proximate cause for disallowance, section 14A cannot be invoked.
Godrej & Boyce Mfg. Co. Ltd. v. Deputy Commissioner of Income-tax, Range 10(2), Mumbai [2010] 194 TAXMAN 203 (Bom.)	Sub-section (2) of section 14A prescribes a uniform method for determining the amount of expenditure incurred in relation to income which does not form part of the total income only in a situation where the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such an expenditure. Sub-section (2) of section 14A does not authorise or empower the Assessing Officer to apply the prescribed method irrespective of the nature of the claim made by the assessee. The Assessing Officer has to first consider the correctness of the claim of the assessee having regard to the accounts of the assessee. The satisfaction of the Assessing Officer has to be objectively arrived at on the basis of those accounts, after considering all the relevant facts and circumstances. The application of the prescribed method arises in a situation where the claim made by the assessee in respect of expenditure which is relatable to the earning of income which does not form part of the total income under the Act is found to be incorrect. Rule 8D which has been notified on 24-3-2008 would apply with effect from the assessment year 2008-09. The rule, consequently, could not have an application in respect of the assessment year 2002-03 which was the year under consideration in the instant case. Even in the absence of sub-sections (2) and (3) of section 14A and of rule 8D, the Assessing Officer was not precluded from making apportionment. Such an apportionment would have to be made in order to give effect to the substantive provisions of sub-section (1) of section 14A which provides that no deduction would be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. Undoubtedly, in determining what would constitute a reasonable method for effecting the disallowance, the Assessing Officer would have to give due regard to all the facts and circumstances of the case.
Commissioner of Income Tax vs. Winsome Textile Industries Ltd. [2009] 319 ITR 204 (P&H)	Even if deduction under s. 36(1)(iii) is ordinarily available in respect of borrowed funds utilised for the purpose of business s. 14A carves out an exception insofar as any expenditure which is relatable to the earning of dividend income not subject to tax is to be disallowed. It is to be ascertained as to whether the assessee has made the investment in purchase of shares out of borrowed funds or invested its own funds. If the assessee has invested its own money in the purchase of shares then there is no question of any disallowance in respect of interest on borrowed funds under s. 14A. However, if the borrowed funds have been utilised for purchase of shares of M/s Winsome Yarns Ltd., disallowance under s. 14A shall have to be calculated even when investment has been made in the course of business of the assessee and the assessee qualifies for deduction under s. 36(1)(iii). Disallowance has got to be made under s. 14A if any expenditure relating to the earning of income which is not chargeable to tax has been debited to the accounts by the assessee. Also followed in CIT-vs- Corrtech Energy (P.) Ltd. [2014] 45 taxmann.com 116 (Gujarat), Lakhani Marketing decided on 2.4.2014. Similar ruling by the Allahabad High Court in case of Shivan Motors decided on 5.5.2014
CIT-vs- Hero Cycles 323 ITR 158 (P &H)	The contention of the revenue, that directly or indirectly some expenditure is always incurred, which must be disallowed under section 14A, and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of section 14A, could not be accepted Disallowance under section 14A requires finding of incurring of expenditure. Where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand.
Maxopp Investment Ltd. v. Commissioner of Income-tax, New Delhi 247 CTR 162 (Del)	The expression 'in relation to' appearing in section 14A cannot be ascribed a narrow or constricted meaning. The expression 'in relation to' does not have any embedded object. It simply means 'in connection with' or 'pertaining to'. If the expenditure in question has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise qualifies under the other provisions of the said Act. While the expression 'expenditure incurred' refers to actual expenditure and not to some imagined expenditure, it is to be made clear that the 'actual' expenditure that is in contemplation under section 14A(1) is the 'actual' expenditure in relation to or in connection with or pertaining to exempt income. The corollary to this is that if no expenditure is incurred in relation to the exempt income, no disallowance can be made under section 14A. The requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of section 14A. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. Investment in shares of operating companies for acquiring and retaining a controlling interest therein is hit by section 14A inasmuch as the dividend received on such shares does not form part of the total income.
	The above ruling was relied upon by the Kolkata Bench of the ITAT in the case of Coal India [I.T.A No. 1032/Kol/2012 decided on 13-5-2015} the Tribunal agreed with the argument that the term ‘expenditure’ as per section 14A would include expenditures that are related to the investment made ie administration, capital expenditure, travelling expenses, operating expenses, etc. That such investment decisions are highly strategic in nature and are required to be made highly qualified and experienced professionals, require research and analysis, need to attend board meetings and make policy decisions. By no stretch of imagination it can be assumed that such activities are done without incurring any expenditure. The Assessee in this case did not rebut these arguments. The Delhi High Court in the case of Oriental Structural Engineers Pvt Ltd [ITA 605/2012 decided on 15-1-2013] rejected the departments appeal against the ruling Delhi Bench of the ITAT wherein it was held that investments made in subsidiaries due to commercial expediencies ie Special Purpose Vehicles had to be set-up in order to contracts from NHAI, in such cases it could not be said that the expenses / interest was incurred for earning exempt income.
Gillette Group India (P.) Ltd. v. Assistant Commissioner of Income-tax, Circle 12(1) [2012] 22 taxmann.com 61 (Delhi)	The disallowance cannot exceed the expenditure actually claimed by the assessee.
Justice Sam P. Bharucha v. Additional Commissioner of Income-tax-11(3), Mumbai [2012] 25 taxmann.com 381 (Mum.)	Section 14A has within its implicit notion of apportionment in the cases where the expenditure is incurred for the composite / indivisible activities in respect of which taxable and non-taxable income is received. But when it is possible to determine the actual expenditure in relation to the exempt income or when no expenditure has been incurred in relation to the exempt income, then principle of apportionment embedded in section 14A has no application In order to disallow the expenditure under section 14A, there must be a live nexus between the expenditure incurred and the income not forming part of total income. A notional expenditure cannot be apportioned for the purpose of earning exempt income unless there is an actual expenditure in relation to earning the income not forming part of total income. If the expenditure is incurred with an aim to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then no disallowance can be made under section 14A merely because some tax exempt income is received by the assessee. It is not the case of the revenue that the assessee has used his official machinery and establishment for earning the exempt income. The Assessing Officer has not given any finding of fact that any of the expenditure that is incurred and claimed by the assessee is attributable for earning the exempt income. In other words, the Assessing Officer has not indicated that certain expenditure is not incurred for earning the professional income, but is incurred in relation to dividend income or such expenditure is incurred for inseparable and indivisible activities comprising professional as well as the activities on which is exempt income has been earned by the assessee. In the absence of any such instance of expenditure, finding of Assessing Officer or any material to show that the expenditure incurred and claimed by the assessee against the taxable income has any relation for earning the exempt income, the provisions of section 14A cannot be applied. Reference may also be made to ITAT ruling in case of ACIT Cir 8(1), N Delhi vs SIL Investments ITA No. 2431(Del)2010 (AY 2006-07) dated 4-5-2012
CCI Ltd. v. Joint Commissioner of Income-tax, Udupi Range [2012] 20 taxmann.com 196 (Kar.)	When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income. Though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to its business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions.
Cheminvest Ltd. v. Income-tax Officer , Ward 3(3), New Delhi [2009] 121 ITD 318 (DELHI)(SB)	The controversy raised in the instant case was that the assessee had not earned or received any dividend in the year under consideration and, therefore, no disallowance could be made by invoking the provisions of section 14A. There was no force in the said contention of the assessee. When the expenditure of interest is incurred in relation to income which does not form part of total income, it has to suffer the disallowance, irrespective of the fact whether any income is earned by the assessee or not. Section 14A does not envisage any such exception.
	Note: This ruling has been impliedly overruled by rulings of various High Courts including Allahbad High Court in the case Shivam Motors Pvt Ltd I.T. Appeal No. 88 of 2014 dated 5-5-2014 for the assessment year 2008-09 and the Gujarat High Court in the case of CIT vs. Corrtech Energy Pvt. Ltd. [2014] 45 taxmann.com 116 (Gujarat) for the assessment year 2009-10 and the Bombay High Court in the case of CIT vs. Delite Enterprises. Certain Tribunals, on the basis of these High Court rulings have doubted the validity of the circular no 5/2014 (The circular clarified that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income).
CIT vs Popular Vehicles And Services Ltd. 325 ITR 523 (Ker)	The share income from the partnership firm which is the only consideration for advancing the loan to the firm does not constitute income of the respondent u/s 10(2A) of the I.T. Act. Since the share income from the firm does not constitute the part of taxable income of the assessee, section 14A(1) applies which prohibits the deduction of any expenditure incurred in relation to income not includible in total income In Dharmasingh M. Popat v. Assistant Commissioner of Income-tax [2010] 127 TTJ 61(Mum) the ITAT has held that Section 14A is applicable in computing total income of assessee-partner in respect of his share in profits of firm
D H Securities Pvt Ltd vs DCIT (ITAT Mum – SB) [ITA nos.5724/ Mum /2011] dated 27-11-2013	Disallowance under section 14A of the IT Act, 1961 can be made in conformity with law even in cases where dividend income has been earned on the shares held as stock-in-trade Contrary view has been expressed by the Kolkata bench of the ITAT in case of Deputy Commissioner of Income-tax, Circle-8, Kolkata v. Baljit Securities (P.) Ltd [2015] 55 taxmann.com 191 (Kolkata - Trib.). It is noticed that the ruling of the Special Bench of the Mumbai ITAT was not brought to the notice of the Kolkata bench though the same was available.
Dhanuka & Sons v. Commissioner of Income-tax, (Central)-1 [2011] 12 taxmann.com 227 (Cal.)	The mere fact that those shares were old ones and not acquired recently was immaterial. It was for the assessee to show the source of acquisition of those shares by production of materials that those shares were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it was for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest was payable by the assessee for acquiring those old shares. In the absence of any such material placed by the assessee, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from exempt source. In the absence of any material disclosing the source of acquisition of shares which was within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment.
Commissioner of Income-tax, Ahmedabad –IV v. Torrent Power Ltd. [2014] 44 taxmann.com 441 (Gujarat)	Where it was apparent from records that assessee had sufficient funds for making investments in shares and interest free bonds and it had not used borrowed funds for such purpose, Assessing Officer was not justified in invoking provisions of section 14A in order to disallow one per cent of interest expenses incurred for earning exempt income. Similar view held in case of Binayak Tex Processors Ltd. [2014] 44 taxmann.com 179 (Mumbai - Trib.) the ITAT opined that if assessee is able to show near proximity of availability of own funds, may be exactly not on date of investment or advancement of loan but in a very near future date or within a reasonable short period of time, even then presumption will be that investment was made by assessee from his own funds or in anticipation of availability of its own funds within a short period of time.
**the key observations have been reproduced verbatim from the ruling itself. While these observations may serve as guiding principles, applicability to a case would need to be evaluated on the basis of current judicial position, specific facts and circumstances