2017 (11) TMI 1644 - AT - Income Tax

Rectification of mistake - Disallowance u/s 14A read with Rule 8D(2)(ii) & (iii) - Held that - ITAT s failure to consider the submissions filed by the assessee at the time of hearing wherein it was demonstrated that the own capital of the assessee exceeds the amount of investment therefore there is no question of making the disallowance of interest expenses. In view of the above we hold that the mistake apparent from the record has occurred in the order passed by this Hon ble ITAT in pursuance to the provisions of section 254(2) of the Act. We therefore recall the impugned order for the limited purpose of adjudication of the disallowance made by the AO under section 14A of the Act. Accordingly the registry is directed to fix the case for hearing in due course of time. Hence the ground filed by the assessee in Miscellaneous Application is allowed.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D(2)(ii) and (iii) amounting to ?17,15,98,000.
2. Consideration of own funds versus borrowed funds for investment purposes.
3. Non-consideration of material facts and previous appellate orders in the decision-making process.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D(2)(ii) and (iii):
The assessee objected to the CIT(A)'s order confirming the AO's disallowance under Section 14A read with Rule 8D(2)(ii) and (iii), which amounted to ?17,15,98,000. The AO's disallowance included ?1,573.03 Lacs for interest and ?143.00 Lacs for administrative expenses. The ITAT noted that the assessee had only offered disallowance for administrative expenses under Rule 8D(2)(iii) but did not offer any disallowance towards interest expenses as required under Rule 8D(2)(ii). The Tribunal observed that no documentary evidence was submitted to prove that no borrowed funds were used for the impugned investments, thus justifying the AO's resort to Section 14A read with Rule 8D.

2. Consideration of own funds versus borrowed funds for investment purposes:
The assessee argued that the ITAT misdirected itself by not considering material facts available on record, including a comparative chart of own funds versus investments held by the assessee from AY 2005-06 to 2008-09. The chart demonstrated that the assessee's own funds significantly exceeded the investments capable of yielding exempt income. For instance, as of 31.03.2007, the assessee's own funds were ?1,733.81 crores, while the investments were ?295.73 crores. These facts suggested that the investments were made from the assessee's own funds, not borrowed funds, thus no interest disallowance was warranted under Section 14A.

3. Non-consideration of material facts and previous appellate orders:
The assessee pointed out that the ITAT failed to consider the CIT(A)'s order for AY 2007-08, which had recorded that the assessee's own funds were substantially more than the investments, implying that no borrowed funds were used for investments. This finding was upheld by the ITAT in the assessee's own case for AY 2007-08. The assessee argued that the ITAT's failure to consider these material facts and previous appellate orders constituted a mistake apparent from the record under Section 254(2) of the IT Act. The ITAT had previously dismissed the revenue's appeal against the CIT(A)'s finding that no interest disallowance was warranted because the investments were made from the assessee's own funds.

Conclusion:
The ITAT acknowledged that the assessee's own capital exceeded the investments, as evidenced by records filed before the lower authorities and the ITAT. The Tribunal noted that in similar circumstances for AY 2007-08, it had decided in favor of the assessee, deleting the addition made by the AO. The ITAT recognized that it had failed to consider the submissions and previous orders demonstrating that the assessee's own capital was used for investments, thus no interest disallowance was justified. Consequently, the ITAT held that a mistake apparent from the record had occurred and recalled the impugned order for limited adjudication on the disallowance made by the AO under Section 14A. The assessee's Miscellaneous Application was allowed, and the case was directed to be fixed for hearing in due course.

Order Pronounced:
The order was pronounced in the open court on 10/11/2017, allowing the Miscellaneous Application filed by the assessee.