2016 (11) TMI 747 - AT - Income Tax

Disallowance u/s 14A - assessee has raised the issue that the disallowance as under Rule 8D2(iii) could be made by the Assessing Officer only after establishing/specifying the nexus of the expenditure with the earning of the exempt income - Held that - The assessee itself has accepted the fact of nexus of expenditure with the earning of the exempt income by disallowing a portion of the expenses suo motu though not under Rule 8D but albeit by adopting a different method which the assessee thought to be reasonable. In such circumstances in our opinion no further action is required on the part of the Assessing Officer to establish the nexus of expenditure with the exempt income when he has invoked the Rule 8D of the Income Tax Rules. We direct the Assessing Officer to compute the disallowance under Rule 8D(iii) of the Income-tax Rules at the rate of 0.5% of the investment which actually have resulted in exempt dividend income rather than 0.5% of the average of total investment. Thus the ground of the assessee is partly allowed. Direct attributable expenses in respect of tax free dividend income - Held that - We find that the assessee has successfully demonstrated complete flow of funds from its borrowing at a lower interest rate to the destination to different corporate entities at a slightly higher rate of interest and therefore the nexus of the interest expenses with activity of financing has been substantiated by the assessee and there is not a single amount of interest-bearing borrowings has been found to be related to the investment which yielded tax free dividend income. The Assessing Officer has failed to establish any nexus between the interest-bearing borrowed funds and the investment in assets yielding tax-free income. In our opinion the findings of the learned Commissioner of Income Tax (Appeals) on the issue in dispute is well reasoned and no interference is required on our side. Further the Assessing Officer in the assessment year 2009-10 has also accepted the fact of having no nexus between the borrowed funds and the investment in assets yielding tax-free income and accordingly has not made any disallowance under Rule 8D2(ii) of the Act. Thus the rule of consistency also demand that no disallowance under section Rule 8D2(ii) of the Act can be made in the year under consideration. In view of above we uphold the findings of the learned Commissioner of Income-tax (Appeals) on the issue in dispute and the ground of the appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962.
2. Satisfaction of the Assessing Officer regarding the incorrectness of the assessee's suo motu disallowance.
3. Proportionate disallowance of interest expenses.
4. Quantum of disallowance exceeding actual expenses incurred.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The assessee challenged the disallowance of ?61,80,689 under Section 14A read with Rule 8D, arguing that Rule 8D was not applicable as the Assessing Officer (AO) had not recorded satisfaction regarding the incorrectness of the assessee's suo motu disallowance. The Tribunal found that the AO had indeed recorded dissatisfaction with the assessee's explanation and invoked Rule 8D accordingly. Therefore, the Tribunal dismissed the assessee's grounds challenging the application of Rule 8D.

2. Satisfaction of the Assessing Officer:
The assessee argued that the AO did not record satisfaction as required for invoking Rule 8D. However, the Tribunal noted that the AO had specifically asked for an explanation and found the assessee's explanation unacceptable, thereby recording dissatisfaction. Consequently, the Tribunal held that the AO's invocation of Rule 8D was justified and dismissed the related grounds of the assessee's appeal.

3. Proportionate Disallowance of Interest Expenses:
The Revenue appealed against the relief granted by the Commissioner of Income-tax (Appeals) [CIT(A)] regarding the proportionate disallowance of interest expenses amounting to ?6,83,66,201. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had demonstrated a clear nexus between borrowed funds and its financing activities, with no borrowed funds being used for investments yielding tax-free income. The Tribunal also emphasized the rule of consistency, as no such disallowance was made in the preceding assessment year.

4. Quantum of Disallowance Exceeding Actual Expenses:
The assessee contended that the disallowance should not exceed the actual expenses incurred, which were ?37,19,979. However, the Tribunal found that the assessee had not included certain expenses, such as legal and professional charges, in its computation. The CIT(A) rejected the assessee's bifurcation of expenses, noting that Rule 8D does not subscribe to such bifurcations and is linked to a percentage of the average value of investments. The Tribunal found no infirmity in the CIT(A)'s findings and dismissed the assessee's ground on this issue.

Conclusion:
The Tribunal dismissed the grounds of the assessee's appeal related to the applicability of Rule 8D and the quantum of disallowance. However, it partly allowed the assessee's appeal by directing the AO to compute the disallowance under Rule 8D(iii) at 0.5% of the investment that actually resulted in exempt dividend income, following the Delhi High Court's decision in ACB India Ltd. The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to allow relief regarding the proportionate disallowance of interest expenses.

Final Decision:
- The assessee's appeal was partly allowed.
- The Revenue's appeal was dismissed.
- The decision was pronounced in open court on 5th September 2016.