2019 (3) TMI 998 - AT - Income Tax

Disallowance u/s 14A r.w.r.8D - own funds exceeding the investments held - HELD THAT - Assessee s own funds in the shape of Share Capital & Free Reserves far exceeded the investment held by the assessee and the investments got reduced in the impugned AY. Therefore, in terms of binding decision rendered in CIT Vs. Reliance Utilities & Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT & CIT Vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT a presumption was to be drawn in assessee s favor that the investments were made out of interest free funds available with the assessee. Therefore, interest disallowance u/r 8D(2)(ii) could not be held to be justified. We order so. Expense disallowance u/r 8D(2)(iii) - suo moto disallowance by assessee - HELD THAT - The assessee has earned the stated exempt dividend income only from one investment i.e. DWS Ultra Short-Term Fund. The average investments in this fund is ₹ 25.49 Lacs & 0.5% of the same comes to ₹ 12,749/- which is less than suo-moto disallowance of ₹ 42,572/- offered by the assessee. This computation is in line with the decision of rendered in ACIT Vs. Vireet Investment (P.) Ltd. 2017 (6) TMI 1124 - ITAT DELHI wherein it has been held that only exempt income yielding investments were to be considered to arrive at the said disallowance. Therefore, the additional expense disallowance, as computed by Ld. AO also could not be sustained. Thus the suomoto disallowance already offered by the assessee was justified and therefore, additional disallowance as sustained by first appellate authority was to be deleted.

Summary

Issues:
Appeal against disallowance u/s 14A for AY 2014-15.

Analysis:
1. The appeal contested the disallowance u/s 14A for AY 2014-15. The assessment was framed by the AO, adding &8377; 2.96 Lacs to the income of the assessee for earning exempt dividend income. The assessee, a resident corporate entity engaged in cargo handling and maritime consultancy, had offered a suo-moto disallowance of &8377; 42,572/- against the exempt income.

2. The AO applied Rule 8D to disallow &8377; 2.96 Lacs, comprising interest and expense disallowances. The first appellate authority confirmed the additions but directed the AO to adjust the suo-moto disallowance. The AR contended that the offered disallowance was fair. The Tribunal found that the assessee's own funds exceeded the investments, citing precedents to justify that investments were made from interest-free funds. Therefore, the interest disallowance was held unjustified.

3. Regarding expense disallowance, the Tribunal noted that the exempt dividend income was earned from a single investment. The computation based on the average investment in this fund was less than the suo-moto disallowance offered by the assessee. Citing a Delhi Tribunal decision, only investments yielding exempt income should be considered for disallowance. Consequently, the additional expense disallowance was deemed unsustainable, and the Tribunal ordered the deletion of the additional disallowance of &8377; 2.53 Lacs as sustained by the first appellate authority.

4. The Tribunal allowed the appeal, directing the deletion of the additional disallowance and ruling in favor of the assessee. The order was pronounced on 3rd January 2019.