2020 (2) TMI 1647 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D Disallowance of proportionate interest (out of interest on Working Capital Loan) - HELD THAT - As the assessee is already having its own surplus fund much more than the investment made and it can be presumed that investments have been made out of own funds and there is no need of making any Disallowance of expenditure in respect of interest. Thus the allocation of interest is not warranted and the Disallowance deserves to be deleted. Disallowance of proportionate interest (out of interest on Working Capital Loan) - Rule 8D is not mandatory, the Assessing Officer must record his satisfaction that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure for cogent reasons. Satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessed as enunciated in the case of Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT and Godrej Boyce v DCIT 2017 (5) TMI 403 - SUPREME COURT From the records or from the arguments of the ld. DR, we find that the invocation of sub-Section (2) of Section 14A is conspicuously absent and hence re-computation of the Disallowance is not legally valid. And considering the investments in mutual funds and in shares are through PMS, hardly any expense is incurred. As such the estimated Disallowance made by assessee suo moto is reasonable as it meets the expenses on account of STT as well as in direct expenses. Hence, we hereby hold that no additional Disallowance is called for by invoking Rule 8D. - Decided in favour of assessee.

Summary

Issues:
Confirmation of additional disallowance u/s 14A r.w. Rule 8D
Disallowance of proportionate interest expenses
Disallowance of prorate administrative expenses
Exclusion of certain investments while computing average value
Disallowance of expenses under Section 14A

Analysis:
The appeal was filed against the orders of the ld. CIT(A)-10, New Delhi regarding the confirmation of additional disallowance u/s 14A r.w. Rule 8D. The assessee raised grounds questioning the disallowance of a sum of Rs.5,92,587/- made by the Assessing Officer u/s 14A of the Act. The dispute primarily revolved around the computation of disallowance, with the Assessing Officer arriving at a figure of Rs.7,40,727/- using Rule 8D, while the assessee computed Rs.1,48,140/-. The net disallowance of Rs.5,92,587/- was determined by the Assessing Officer after allowing credit for the amount disallowed by the assessee. The disallowance included proportionate interest and additional indirect administrative expenses.

Regarding the disallowance of interest, the assessee argued that investments were made from surplus funds, not borrowed funds, and highlighted the decrease in total investments yielding tax-free income. The assessee's financial position demonstrated sufficient own funds, making the disallowance of interest unwarranted. The reliance was placed on various judgments to support this argument. The Tribunal agreed that the allocation of interest was not justified and deserved to be deleted.

On the disallowance of expenses, the assessee had already disallowed certain amounts for DP charges, STT, and indirect expenses. The AO's calculation of disallowance under Section 14A r.w. Rule 8D included investments in a partnership firm on which no exempt income was received during the year. The Tribunal referred to principles established by the Hon’ble High Court of Bombay to determine the quantum of disallowance, emphasizing the need for the Assessing Officer's satisfaction with the correctness of the claim of the assessee.

The Tribunal concluded that Rule 8D was not mandatory, and the Assessing Officer must have cogent reasons for not being satisfied with the correctness of the claim of the assessee regarding expenditure. The absence of the invocation of sub-Section (2) of Section 14A rendered the re-computation of disallowance legally invalid. Considering the investments made through Portfolio Management Services (PMS) and the reasonable estimation of expenses by the assessee, the Tribunal held that no additional disallowance was warranted by invoking Rule 8D. Consequently, the appeal of the assessee was allowed.