2018 (2) TMI 1938 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D(2)(iii) - HELD THAT - The availability of own funds of the assessee to the tune of ₹ 28.85 crores and the fact that the closing value of investment in the balance sheet as on the last date of the previous year was ₹ 22.3 crores clearly demonstrates that the assessee had sufficient own funds which were more than the value of investments. Apart from the above the source of investments on each of the investments made by the assessee during the previous year has been explained by the assessee in a chart filed before CIT(A). The factual accuracy of this chart has not been disputed by the revenue. In such circumstances we find no merits in this appeal by the revenue challenging the deletion of addition in terms of Rule 8D(2)(ii) of the rules,. In so far as the disallowance of other expenses under Rule 8D(2)(iii) of the rules is concerned we are of the view that direction of CIT(A) to include only investments which yielded dividend income while computing average value of investments before applying the formula of Rule 8D(2)(iii) of the Rules is in accordance with the decision of the tribunal in the case of REI Agro Ltd 2013 (9) TMI 156 - ITAT KOLKATA - Decided against revenue.

Summary

Issues:
1. Disallowance of expenses under section 14A of the Income Tax Act, 1961.
2. Challenge of disallowance under Rule 8D(2)(ii) and 8D(2)(iii) of the IT Rules.
3. Disallowance under Rule 8D(2)(ii) - Interest expenses.
4. Disallowance under Rule 8D(2)(iii) - Other expenses.
5. Appeal by the Revenue against the order of the CIT(A).

Issue 1: Disallowance of expenses under section 14A of the Income Tax Act, 1961:
The appellant, a company engaged in consultancy services and investments, earned exempt income through dividends and long-term capital gains. The Assessing Officer (AO) disallowed expenses under section 14A of the Act as he believed borrowed funds were used for tax-free income. The AO computed disallowance under Rule 8D of the IT Rules due to interest expenses and administrative costs. The appellant challenged this disallowance before the CIT(A).

Issue 2: Challenge of disallowance under Rule 8D(2)(ii) and 8D(2)(iii) of the IT Rules:
The appellant contested the disallowance under Rule 8D(2)(ii) by demonstrating that investments were made from its own funds, not borrowed funds. The appellant also argued against disallowance under Rule 8D(2)(iii) by stating that only investments yielding exempt income should be considered in the calculation.

Issue 3: Disallowance under Rule 8D(2)(ii) - Interest expenses:
The appellant presented a detailed chart showing the source of investments, highlighting that interest-free own funds were available, which exceeded the value of investments made. Citing a Bombay High Court decision, the appellant argued that disallowance under Rule 8D(2)(ii) should be deleted due to the availability of interest-free funds.

Issue 4: Disallowance under Rule 8D(2)(iii) - Other expenses:
Regarding disallowance under Rule 8D(2)(iii), the appellant argued that only investments generating dividend income should be considered in the average value calculation. The CIT(A) agreed with this submission, leading to a reduction in the disallowance amount under Rule 8D(2)(iii).

Issue 5: Appeal by the Revenue against the order of the CIT(A):
The Revenue appealed the CIT(A)'s decision to the tribunal, challenging the deletion of disallowance under Rule 8D(2)(ii) and the direction for re-examination of investment calculations. The tribunal dismissed the Revenue's appeal, emphasizing the adequacy of the appellant's own funds and the correctness of the CIT(A)'s directions regarding investment calculations.

In conclusion, the tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal and affirming the deletion of disallowance under Rule 8D(2)(ii) and the calculation methodology for other expenses under Rule 8D(2)(iii).