2022 (1) TMI 678 - AT - Income Tax

Addition u/s 14A r.w.r 8D - disallowance made by invoking Rule 8D(2)(iii) of the I.T. Rules is for administrative and common expenses when the assessee derives exempted income - HELD THAT - In the instant case, in each of the assessment year s huge investments are made which is given rise to exempted dividend income. Investment decisions are very complex and strategic which requires administrative support. Assessee would have incurred administrative expenses such as salary, wages, general expenses, stationery etc. Therefore, it cannot be said that no expenditure was incurred for making the said investments. Hence, we confirm the disallowance made by the AO by invoking provisions of section 14A of the I.T. Act r.w. Rule 8D(2)(iii) of the I.T. Rules. Disallowance of indirect interest expenditure by invoking the provisions of section 14A of the I.T. Ac r.w. Rule 8D(2(ii) - Admittedly, interest on borrowed funds used for business purposes cannot be computed for disallowance u/s. 14A of the I.T. Act r.w. Rule 8D(2)(ii) of the I.T. Rules. It is the duty of the assessee to prove that interest was incurred on borrowings are used for the specific business purpose and non-interest bearing funds were utilized for making investments which has given rise to exempted income. The assessee to prove that it is having its own funds to make investment which had yielded exempted income, necessarily has to furnish cash flow statement. The cash flow statement would disclose as on the date of making investments, which had given rise to the exempted income, that the assessee had interest free funds available with it. In the interest of justice and equity, we deed it fit to remand the case to the Assessing Officer for fresh consideration. Grounds raised by assessee stands allowed for statistical purposes.

Issues Involved:
1. Jurisdiction of assessment under Section 132 and 153A of the Income-tax Act.
2. Disallowance under Section 14A read with Rule 8D of the Income-tax Rules.
3. Attribution of expenses towards earning exempt income.
4. Levy of interest under Sections 234A, 234B, and 234C.
5. Initiation of penalty proceedings under various sections of the Income-tax Act.

Detailed Analysis:

1. Jurisdiction of Assessment:
The assessee challenged the jurisdiction of the assessment under Sections 132 and 153A, arguing that the assessment lacked jurisdiction in law. The tribunal did not specifically address this issue in the judgment, focusing instead on the disallowance under Section 14A.

2. Disallowance under Section 14A:
The primary issue was whether the CIT(A) was justified in confirming the addition made under Section 14A of the Income-tax Act read with Rule 8D of the Income-tax Rules. The assessee argued that the investments in SBI mutual funds were made for taxable income purposes and as per the directions of SBI bank, which required a lien or security for the opening of the LC for import trade. The assessee contended that no expenses were attributable to the generation of dividend income and that the investments were made from internal accruals and not from borrowed funds.

3. Attribution of Expenses:
The tribunal observed that investment decisions are complex and strategic, requiring administrative support, and thus, administrative expenses such as salary, wages, and general expenses are incurred. Therefore, the tribunal confirmed the disallowance made by the Assessing Officer by invoking provisions of Section 14A read with Rule 8D(2)(iii) for administrative expenses.

Regarding the disallowance of indirect interest expenditure, the tribunal noted that the assessee failed to demonstrate that interest-free funds were used for making investments. The tribunal emphasized the need for the assessee to furnish a cash flow statement to prove that interest-free funds were available for making investments.

4. Levy of Interest:
The assessee also challenged the levy of interest under Sections 234A, 234B, and 234C, arguing that it was levied without giving an opportunity of being heard. The tribunal did not specifically address this issue in the judgment.

5. Penalty Proceedings:
The assessee contended that the initiation of penalty proceedings under Sections 271A, 271AA, 271BA, 271G, and 271(1)(c) was erroneous. The tribunal did not specifically address this issue in the judgment.

Remand and Directions:
The tribunal remanded the case to the Assessing Officer for fresh consideration, directing the assessee to furnish a cash flow statement to support the contention that investments were made from interest-free funds. The tribunal instructed the Assessing Officer to afford a reasonable opportunity of being heard to the assessee.

Conclusion:
The appeals filed by the assessee were allowed for statistical purposes, with the tribunal remanding the case for fresh consideration regarding the disallowance under Section 14A. The tribunal confirmed the disallowance for administrative expenses but required further examination of the interest disallowance by the Assessing Officer. The tribunal emphasized the need for proper opportunity and documentation to support the assessee's claims.

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