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2015 (3) TMI 395 - AT - Income TaxDisallowance made under rule-8D(2)(iii) - Held that - Nothing specific has been mentioned about non-incurring of any indirect expenditure, it is clear that major part of the investments were done in FY 2005-06. Incremental investment was only 4.80 lakhs. The investment which yielded the dividend income of ₹ 33,600/- claimed as exempt, came from shares worth ₹ 2,30,400/- held in M/s Indian Overseas Bank, which holding was the same all though, brought forward from earlier year. Under section 14A of the Act, once assessee has taken a stand that it had not incurred any expenditure under section 14A, then in our opinion, the AO is not justified in invoking Rule 8D(2)(iii) for a disallowance of indirect expenditure unless he recorded his dis-satisfaction of claim. It is essential such non-satisfaction has to be given with cogent reasons before invoking Section 14A. Doctrine of satisfaction no doubt, does not mean that an AO should presume what was in the mind of the assessee and express his approval or disapproval thereon. However, once assessee say that it had incurred no expense covered by section 14A of the Act for its investment portpolio, AO has to make a verification. Especially so, when incremental investments is negligible. In these circumstances, we are of the opinion that CIT(A) while he was justified in deleting the disallowances made under Rule 8D(2)(ii) and ought not have sustained the disallowance made under Rule 8D(2)(iii). Order of the learned CIT(A) is set aside to the extent. Disallowance under rule 8D(iii) is also deleted. - Decided in favour of assessee.
Issues Involved:
1. Deletion of disallowance made by the Assessing Officer (AO) under Rule 8D(2)(ii) of the Income Tax Rules, 1962 read along with Section 14A of the Income-tax Act, 1961. 2. Assessee's objection to the disallowance made by the AO under Rule 8D(2)(iii) which was sustained by the Commissioner of Income Tax (Appeals) [CIT(A)]. Detailed Analysis: 1. Deletion of Disallowance under Rule 8D(2)(ii): The revenue's appeal contended that a disallowance under Section 14A could be made only by resorting to Rule 8D and not otherwise. The AO found that the assessee, a builder, had significant investments and charged substantial interest in its Profit & Loss account. The AO proposed a disallowance of expenditure attributable to the investments, which the assessee opposed, claiming that the investments were made from non-interest-bearing funds. The AO, unsatisfied with the assessee's explanation and lack of a fund flow statement, applied Rule 8D(2)(ii) and computed a disallowance of Rs. 4,64,15,708/-. The CIT(A), upon appeal by the assessee, held that the assessee had sufficient interest-free funds to cover the investments, and thus, disallowance under Rule 8D(2)(ii) was not warranted. The CIT(A) noted that major portions of the investments were made in FY 2005-06, and thus, the disallowance under Rule 8D(2)(ii) was deleted. Upon further appeal by the revenue, it was argued that the assessee failed to provide evidence showing that only own funds were used for investments. The appellate tribunal, however, upheld the CIT(A)'s decision, emphasizing that the assessee had substantial interest-free funds exceeding the investments made, and thus, it could be presumed that the investments were made from these interest-free funds. This view was supported by judgments from the Hon'ble Gujarat High Court in CIT Vs Gujarat Industrial Development Corporation Ltd and the Hon'ble Punjab & Haryana High Court in CIT Vs Deepak Metal, which established that if interest-free funds are available, a nexus between borrowed funds and investments need not be proved. 2. Disallowance under Rule 8D(2)(iii): The assessee objected to the disallowance made by the AO under Rule 8D(2)(iii), which was sustained by the CIT(A). The AO applied 0.5% of the average value of investments, arriving at a disallowance figure of Rs. 31,74,299/-. The CIT(A) confirmed this disallowance, reasoning that no investment could stand without any expenditure. The assessee argued that the investments yielding dividend income were minimal and held without incurring any expenditure. The assessee contended that the AO had not recorded the necessary satisfaction for discounting the claim of no expenditure incurred for earning the exempt income. The tribunal noted that the AO must record dissatisfaction with the assessee's claim before invoking Rule 8D(2)(iii). Since the AO failed to do so and the incremental investment was negligible, the tribunal concluded that the CIT(A) erred in sustaining the disallowance under Rule 8D(2)(iii). Consequently, the disallowance under Rule 8D(2)(iii) was deleted. Conclusion: The tribunal dismissed the revenue's appeal and allowed the assessee's cross-objection. The disallowance under Rule 8D(2)(ii) was deleted, and the disallowance under Rule 8D(2)(iii) was also set aside. The order was pronounced in open court on 20-02-2015.
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