2021 (11) TMI 1134 - AT - Income Tax

Disallowance u/s 14A - AO held that the suo moto disallowance offered by the assessee is not properly explained - HELD THAT - Disallowance offered by assessee was considered by learned assessing officer. In addition, the same was rejected giving proper reasoning. Therefore it is apparent that the learned assessing officer has recorded proper satisfaction for invoking the provisions of rule 8D of the income tax rules 1962 for working of the disallowance u/s 14 A of the act. Disallowance u/r 8D (2)(i) - The total investment made by the assessee in which tax-free income could have been earned is ₹ 1343 crores as on that date. Further, that investment from which exempt income has been actually earned during the year is only ₹ 605 crores. Furthermore, the investment made by the assessee is out of the mixed funds, as it did not maintain the books of account of the earning exempt income as well as taxable income separately - we hold that there cannot be any interest disallowance in the case of the assessee. Accordingly, the interest disallowance made under rule 8D (2) (i) of the act of ₹ 24,657,534/ deserves to be deleted, hence, we direct the learned assessing officer to delete the same. Disallowance under rule 8D (2) (iii) the amount equal to % of the average value of the investment Income from which does not or shall not farm part of the total income as appearing in the balance sheet of the assessee on the first day and the last day of the previous year - The claim of the assessee is that the opening balance and closing balance of the investments on which exempt income is received during the year is Rs Nil. The assessee has submitted the various accounts of such investments before us. In case if the opening balance and the closing balance of such investments from which exempt income is received during the year is rupees nil, naturally the average of such investment would also be Nil and therefore the consequent disallowance would also be Nil. We hold that there cannot be any disallowance under rule 8D (2) (iii) of the act is also Nil. Accordingly, we direct the learned assessing officer to delete the disallowance under rule 8D (2)(iii) of the act. Accordingly we direct the learned assessing officer to delete the disallowance under that sub rule amounting to Rs 1 71,87,853/ . Accordingly we direct the learned assessing officer to delete the disallowances confirmed by the learned CIT A being the interest expenses stated by the learned assessing officer to be directly attributable to the earning of the exempt income as well as a sum being 0.5% of the average value of investment on the opening and closing day of the previous year. Appeal of the assessee is allowed.

Summary

Issues:
Disallowance under Section 14A of the Income Tax Act, 1961.

Analysis:
1. The appeal was filed against the order of the Commissioner of Income Tax (Appeals) confirming the disallowance of Rs. 4,12,57,744 under Section 14A for the assessment year 2010-11.
2. The assessee, a power generation company, declared a total income of Rs. 14,42,18,987, later revised to Rs. 14,34,37,237, showing a dividend income of Rs. 29,22,77,694 with a disallowance of Rs. 5,87,643 under Section 14A.
3. The Assessing Officer found discrepancies in the disallowance made by the assessee and computed the disallowance under Rule 8D, considering the funds utilized for investments and interest expenditure.
4. The CIT (Appeals) partly upheld the disallowance, leading the assessee to appeal further.
5. The authorized representative argued that interest-free funds exceeded investment amounts, investments for disallowance were nil, and interest disallowance was unjustified based on fund sources and utilization.
6. The departmental representative supported the lower authorities' orders, emphasizing correct disallowance computation under Rule 8D.
7. The Tribunal reviewed the contentions and orders, finding proper satisfaction for invoking Rule 8D for disallowance under Section 14A.
8. The Tribunal addressed the disallowance under Rule 8D(2)(i), noting interest-free owned funds exceeding investments and held that interest disallowance was unwarranted, directing its deletion.
9. The Tribunal also analyzed the disallowance under Rule 8D(2)(iii), concluding that no disallowance was applicable due to nil investment balances, directing deletion of the disallowance.
10. Consequently, the Tribunal directed the assessing officer to delete the confirmed disallowances of interest expenses and 0.5% of the average investment value, allowing the appeal.

This detailed analysis covers the issues involved in the legal judgment, highlighting the arguments presented, authorities' decisions, and the Tribunal's final ruling on the disallowance under Section 14A of the Income Tax Act, 1961.