2022 (1) TMI 829 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - Suo moto addition made by assessee - CIT(A) held that the provision of Rule 8D(2)(ii) were applicable in the facts of the case - According to the Ld. AR, the assessee's investment in earning the dividend income is from interest free source meaning that assessee had its own fund for investment for earning the exempt income. Therefore, according to him, Rule 8D(2)(ii) will not be applicable - HELD THAT - Facts as discerned from the records, we safely infer that since assessee had own fund which was sufficient to make investment fund which yielded exempt income, no disallowance of interest invoking Rule 8D(ii) of the Rules was warranted. For that we rely on case of Reliance Utilities Powers Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT wherein held that when the assessee is possessed of mixed funds which includes its own funds in sufficient quantity, the presumption is that its own funds were utilised for the advances is to be drawn. The aforesaid view of the Hon'ble Bombay High Court has been approved by the Hon'ble Supreme Court in the case of South Indian Bank Vs. CIT 2009 (1) TMI 4 - BOMBAY HIGH COURT - Therefore, Rule 8D(2)(ii) is not applicable in this case. Ergo the assessee succeeds and therefore, the disallowance made by the AO applying Rule 8D(2)(ii) is deleted.

Summary

Issues Involved:
Appeal against Ld. CIT(A) order for AY 2013-14 regarding the applicability of Rule 8D(2)(ii) of Income Tax Rules, 1962.

Analysis:

Issue 1: Applicability of Rule 8D(2)(ii) of the Rules
The primary issue in this case was whether the provision of Rule 8D(2)(ii) of the Income Tax Rules, 1962 was applicable to the assessee. The AO had made a disallowance under Rule 8D(2)(ii) amounting to ?88,40,333, which was confirmed by the Ld. CIT(A) and challenged by the assessee. The crux of the matter was whether the investment for earning exempt income was from interest-free sources, thereby rendering Rule 8D(2)(ii) inapplicable. The Ld. AR argued that the assessee had sufficient capital to make investments from its own funds, thus no disallowance under Rule 8D(2)(ii) was warranted. The Ld. DR, on the other hand, contended that since the assessee had interest expenditure of over ?2 crores and did not maintain separate books, the AO rightly applied Rule 8D(2)(ii).

Analysis of Judgment:
After considering the arguments from both parties, the Tribunal noted that the assessee had earned dividend income of ?1,57,61,357, which was exempt from tax, and had made a SUO MOTO disallowance. The AO inferred that borrowed funds might have been utilized for earning exempt income, leading to the disallowance under Rule 8D(2)(ii). However, based on the facts that the assessee had sufficient capital to make investments from its own funds, the Tribunal concluded that Rule 8D(2)(ii) was not applicable. Citing the decision of the Hon'ble Bombay High Court and the Hon'ble Supreme Court, the Tribunal held that when an assessee has mixed funds, the presumption is that its own funds were utilized for investments. Therefore, the disallowance made under Rule 8D(2)(ii) by the AO was deleted, and the appeal of the assessee was allowed.

Conclusion:
The Tribunal ruled in favor of the assessee, stating that Rule 8D(2)(ii) was not applicable in this case as the investments for earning exempt income were made from the assessee's own funds. The disallowance made by the AO was deleted, and the appeal was allowed.