2019 (2) TMI 695 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - sufficiency of own funds - Held that - As decided in THE A.C.I.T., PANCHKULA CIRCLE, PANCHKULA VERSUS M/S JANAK GLOBAL RESOURCES PVT. LTD. 2018 (12) TMI 902 - ITAT CHANDIGARH wherein deleting the disallowance of interest made on finding that it had sufficient own interest free funds for making the investment, which fact has not been controverted by the Revenue, we see no reason to interfere in the order of the Ld. CIT(Appeals) and the ground raised by the Revenue, therefore, is dismissed. - Decided in favour of assessee

Issues Involved:
1. Disallowance of expenditure under Section 14A of the Income-tax Act, 1961.
2. Application of Rule 8D of the Income Tax Rules, 1962.
3. Presumption theory regarding the utilization of own funds versus mixed funds.
4. Reliance on judicial precedents including decisions of the Jurisdictional High Court and the Supreme Court.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure under Section 14A of the Income-tax Act, 1961:
The primary issue revolves around the disallowance of expenditure incurred to earn tax-exempt income under Section 14A of the Income-tax Act, 1961. The Assessing Officer (AO) disallowed ?2,89,72,984/- against the tax-exempt dividend income earned by the assessee, invoking Section 14A read with Rule 8D. The Commissioner of Income Tax (Appeals) [CIT(A)] restricted this disallowance to ?16,53,617/- based on the availability of sufficient own funds by the assessee.

2. Application of Rule 8D of the Income Tax Rules, 1962:
The AO applied Rule 8D to compute the disallowance, which was partially upheld by the CIT(A). The CIT(A) deleted the disallowance related to interest expenditure under Rule 8D(2)(ii), citing sufficient own funds available with the assessee, but sustained the disallowance of administrative expenses under Rule 8D(2)(iii).

3. Presumption Theory Regarding the Utilization of Own Funds versus Mixed Funds:
The CIT(A) relied on the presumption theory upheld by the Jurisdictional High Court in the case of ‘CIT Vs. Kapsons Associates’ (2016) 381 ITR 204 (P&H), which states that if an assessee has sufficient own funds, it is presumed that investments are made from those funds, thereby negating disallowance under Section 14A. However, the Revenue contended that this presumption theory has been overruled by the Supreme Court in ‘Maxopp Investment Ltd. Vs. CIT’ (2018) 402 ITR 640 (SC), which upheld the principle of apportionment of expenses when mixed funds are used.

4. Reliance on Judicial Precedents Including Decisions of the Jurisdictional High Court and the Supreme Court:
The Tribunal examined the relevance of judicial precedents, including the Supreme Court's decision in ‘Maxopp Investment Ltd. Vs. CIT’ and ‘Hero Cycles Vs. CIT’ 379 ITR 347 (SC). The Tribunal noted that the Supreme Court's decision in ‘Avon Cycles Ltd. Vs. CIT’ emphasized the principle of apportionment in cases of mixed funds but did not negate the presumption theory where sufficient own funds are available. The Tribunal upheld the CIT(A)’s decision, emphasizing that the presumption theory remains valid when sufficient own funds are demonstrated.

Conclusion:
The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)’s order that deleted the disallowance of interest expenditure under Rule 8D(2)(ii) due to the availability of sufficient own funds. The Tribunal reiterated that the presumption theory is still applicable, as upheld by the Supreme Court in ‘Hero Cycles Pvt. Ltd.’, and that the principle of apportionment applies primarily in cases involving mixed funds without sufficient own funds. The appeal of the Revenue was dismissed, maintaining consistency with prior decisions.

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