2022 (3) TMI 1568 - AT - Income Tax

Disallowance of interest expenditure u/s 14A - expenditure incurred on earning exempt income - as argued when the assessee had sufficient interest free funds available with it therefore disallowance made by AO of the interest expenditure u/s.14A r.w Rule 8D(2)(ii) could not be sustained - HELD THAT - We are of the considered view that as stated by the AR and rightly so now when the assessee society had sufficient interest-free own funds available with it which would sufficiently justify the investment made in the exempt income yielding assets therefore no part of the interest expenditure could have validly been disallowed u/s.14A r.w Rule 8D(2)(ii). Our foresaid view is fortified by the judgment of South Indian Bank Ltd. Vs. CIT ( 2021 (9) TMI 566 - SUPREME COURT ) as observed where interest-free own funds available with the assessee exceeded their investment in tax free securities then it would be presumed that investments were made by the assessee out of its own funds and no disallowance would be warranted u/s.14A r.w Rule 8D(2)(ii) of the Income Tax Rules 1962 on the ground that separate accounts were not maintained by the assessee for investments and other expenditure incurred for earning of tax free income. Thus we are unable to persuade ourselves to sustain the disallowance of interest expenditure of Rs.3, 99, 790/- made by the Assessing Officer u/s.14A r.w Rule 8D(2)(ii) of the Income Tax Rules 1962 which is accordingly vacated. TDS credit denied - As the said fact would require necessary verification therefore we direct the Assessing Officer to look into the aforesaid issue. In case credit of the aforesaid amount of tax deducted at source had not been given while processing/assessing the return of income of the assessee then the needful be done. Thus the Ground of appeal raised in appeal by the assessee is allowed for statistical purposes.

Summary

Issues:
Appeal against order passed by CIT (Appeal) for assessment year 2012-13. Grounds of appeal: 1) Proper opportunity not allowed, 2) Disallowance of Rs.3,99,790/- under Sec.14A, 3) Non-allowance of TDS credit of Rs.3,375/-

Analysis:
1. The appellant, a co-operative bank, filed its return for the assessment year 2012-13, declaring income of Rs.1,07,17,370/-. The case was selected for scrutiny assessment under Sec.143(2) of the Act.
2. The Assessing Officer observed that the appellant had earned exempt income but did not offer any part of the expenditure towards it for disallowance. A disallowance of Rs.3,99,790/- was made under Sec.14A by invoking Rule 8D(2)(ii) of the Income-Tax Rules, 1962.
3. The CIT(Appeals) upheld the disallowance, leading the appellant to appeal before the ITAT.
4. During the appeal hearing, the appellant contended that no interest expenditure should be disallowed under Sec.14A as it had sufficient self-owned funds for investments in exempt income yielding assets.
5. The ITAT analyzed the financial statements and found that the appellant had substantial interest-free funds exceeding the investment in exempt income yielding assets. Citing the judgment in South Indian Bank Ltd. Vs. CIT (2021) 438 ITR 1 (SC), the ITAT concluded that no disallowance was warranted under Sec.14A as investments were made from own funds.
6. Consequently, the disallowance of Rs.3,99,790/- was vacated, and the appeal on this ground was allowed.
7. Regarding the non-allowance of TDS credit of Rs.3,375/-, the ITAT directed the Assessing Officer to verify and provide the necessary credit if not already done.
8. The ITAT allowed the appeal in favor of the appellant based on the above observations.

This judgment highlights the proper application of Sec.14A in disallowing expenses related to exempt income, emphasizing the importance of sufficient interest-free funds to justify investments. The ITAT's decision was supported by legal precedent and a thorough analysis of the appellant's financial position.