2021 (3) TMI 41 - AT - Income Tax

Disallowance u/s. 14A r.w.r. 8D - Addition on account of interest under Rule 8D(2)(ii) and indirect expenses under Rule 8D(2)(iii) - HELD THAT - As far as the disallowance of interest expenses under Rule 8D(2)(ii) of interest is concerned, from the copy of Balance Sheet placed by the assessee we find that the interest free funds of the assessee in the form of Share Capital and Reserves and Surplus as on 31.03.2013 are in the region of ₹ 59 crores as against the investments of around ₹ 1 crore meaning thereby that the interest free funds are more than the investments. On the issue of presumptions that when interest free funds available with the assessee are in excess of investments and then the investments are presumed to be out of interest free funds,. We find that Hon'ble Bombay High Court in the case of HDFC . 2014 (9) TMI 1042 - BOMBAY HIGH COURT held that there is now no need for the assessee to establish with evidence that the amounts which has been invested in the tax free securities have come out of interest free funds available with it. This is because once the assessee is possessed of interest free funds sufficient to make the investment in tax free securities, it is presumed that it has been paid for out of the interest free funds - we are of the view that no disallowance of interest under Rule 8D(2)(ii) is called for in the present case. Disallowance of indirect expenses under Rule 8D(2)(iii) before us, Learned AR fairly admitted that the maximum disallowance can be to the extent worked out under Rule 8D(2)(iii). We therefore, uphold the action of AO as far as the disallowance of ₹ 50,565/- under Rule 8D(2)(iii) is concerned. Thus the ground of appeal of the assessee is partly allowed.

Summary

Issues:
- Disallowance under section 14A of the Income Tax Act

Analysis:
The appeal was filed against the order of the Commissioner of Income Tax (Appeals) relating to the Assessment Year 2013-14. The primary issue revolved around the disallowance under section 14A of the Act. The Assessing Officer had disallowed an amount under Rule 8D of the Income Tax Rules, comprising interest disallowance and indirect expenses. The assessee contended that no disallowance should be made as the investments were out of interest-free funds. The Assessing Officer and the CIT(A) upheld the disallowance. The assessee argued that the interest-free funds available were more than the investments, hence no disallowance should be made under Rule 8D(2)(ii). The Hon'ble Bombay High Court's decision in HDFC vs. DCIT was cited, emphasizing that if interest-free funds are sufficient to make investments, it is presumed that the investments are made out of interest-free funds. Consequently, the Tribunal held that no disallowance of interest under Rule 8D(2)(ii) was warranted, but the disallowance under Rule 8D(2)(iii) was upheld. The appeal was partly allowed, and the disallowance was restricted to the amount calculated under Rule 8D(2)(iii).

In conclusion, the Tribunal's decision was based on the interpretation of Rule 8D and the application of the principle that investments made out of interest-free funds do not warrant disallowance under section 14A. The judgment highlighted the importance of assessing each year independently and cited relevant case law to support the decision. The Tribunal's analysis focused on the specific amounts disallowed under Rule 8D and the adequacy of interest-free funds in relation to investments. The decision provided clarity on the treatment of disallowances under section 14A and upheld the principle that investments funded by interest-free sources should not attract disallowances related to interest expenses.