2016 (11) TMI 1405 - AT - Income Tax

Disallowing the expenses relatable to exempted income by invoking the provisions of Section 14A read with Rule 8D - Held that - No disallowance u/s Rule 8D can be made as the assessee is having non-interest bearing funds available in the shape of share capital and reserves and surpluses with him amounting to ₹ 285.27 crore which is more than the amount of investment made in interest earning instruments amounting to ₹ 18.19 crores and once availability of amount from interest free fund of the assessee is more than the investment, then a presumption arises that assessee might have invest out of interest free fund available with him. See HDFC Bank Ltd. (2014 (8) TMI 119 - BOMBAY HIGH COURT ). As regards to direct expenditure under Rule 8D (1), there is no dispute. As regards to working of disallowance under Rule 8D (3), the assessee has computed the disallowance and the Assessing Officer could not point out any discrepancy or unreasonableness or could not find any fault in the same. Accordingly, we delete the addition and allow the appeal of the assessee retaining the same to the extent of the assessee suo-moto disallowance of sum of ₹ 11,78,104/-.- Decided in favour of assessee.

Summary

Issues:
Disallowance of expenses relatable to exempted income under Section 14A of the Income Tax Act.

Analysis:
The only issue in this appeal was the disallowance of expenses related to exempted income under Section 14A of the Act. The Assessing Officer disallowed expenses amounting to ?75,84,842 attributed to earning exempt income. The assessee revised the disallowance to ?11,78,104, which included demat and depository charges, emoluments of fund management team, and other expenses prorated from the head office expenses. The assessee argued that no disallowance under Rule 8D could be made as the non-interest bearing funds exceeded the investments, citing the HDFC Bank Ltd. case. The Tribunal found that the assessee had sufficient non-interest bearing funds, leading to a presumption that investments were made from these funds, supported by the HDFC Bank Ltd. case. The Tribunal noted no dispute on direct expenditure under Rule 8D(1) and found no faults in the assessee's disallowance calculation under Rule 8D(3. Consequently, the Tribunal deleted the addition and allowed the appeal, upholding the assessee's suo-moto disallowance of ?11,78,104.

This judgment highlights the importance of considering non-interest bearing funds when determining disallowance under Section 14A. The Tribunal emphasized the presumption that investments are made from interest-free funds when such funds exceed the investments, as seen in the HDFC Bank Ltd. case. The Tribunal's decision to delete the addition and allow the appeal was based on the adequacy of non-interest bearing funds, lack of discrepancies in the disallowance calculation, and the absence of faults pointed out by the Assessing Officer. The judgment provides clarity on the application of Rule 8D and the relevance of non-interest bearing funds in determining disallowances related to exempt income.