2022 (3) TMI 1210 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D(2)(ii) on account of interest - As argued AO without recording any satisfaction has proceeded to make disallowance - assessee made suo motu disallowance under section 14A read with Rule 8D for earning dividend income - HELD THAT - Assessee's specific contention was that no borrowed funds have been utilized and all the investments have been made in the earlier years from the assessee's own funds and, has not been rebutted and therefore, there was no reason for making any disallowance on account of interest. AO however without recording his satisfaction or examining the nature of investment and expenditure debited in books of account and mechanically applied Rule 8D without recording any satisfaction which is evident from the assessment order and succinctly made disallowance of expenditure of interest under Rule 8D(2) and under Rule 8D(2)(iii). CIT(A), after calling the remand report and considering the material available on record, restricted the amount of disallowance of exempt income, however, has not specifically dealt with assessee's argument how interest cost can be apportioned when assessee has used its own funds for making the investment. It is well settled proposition that if assessee has own funds which is higher than the investment for earning tax free income then presumption is drawn that all the investments in the tax free earning income has been made out of assessee's own fund. This proposition has now been approved in the case of South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT Accordingly, no disallowance of interest can be made and the same is directed to be deleted. Moreover, we find that in the earlier year also, similar finding has been given by the Tribunal. Accordingly, the appeal filed by the assessee is allowed.

Summary

Issues:
Challenge to disallowance under section 14A read with Rule 8D(2)(ii) on account of interest.

Detailed Analysis:

1. Background and Facts:
The appeal was filed by the assessee against the order passed by the ld. CIT(A)-16, New Delhi for the assessment year 2016-17, challenging the disallowance under section 14A read with Rule 8D(2)(ii) on account of interest. The assessee, engaged in electronics and computer hardware business, earned dividend income of ?33,10,110, claimed as exempt. The assessee made a suo motu disallowance of ?2,77,600 under Rule 8D(2)(iii) based on the average value of investments. However, the Assessing Officer (AO) proceeded to disallow ?2,97,06,189 under Rule 8D(2) without recording any satisfaction.

2. Contentions Before CIT(A):
The assessee argued that only investments yielding tax-free income should be considered for disallowance under Rule 8D(2)(ii) and (iii), citing judicial precedents. The assessee contended that no disallowance of interest expenditure should be made as its own funds exceeded the investments generating tax-free income. The CIT(A) partially accepted the contentions but reduced the disallowance to the extent of exempt income.

3. Tribunal's Decision:
The Tribunal noted that the assessee had surplus funds for investments and had not utilized borrowed funds. It observed that the AO mechanically applied Rule 8D without recording satisfaction, leading to a significant disallowance of interest expenditure. The Tribunal referred to the principle that if an assessee's own funds exceed investments for earning tax-free income, it is presumed that all such investments are from the assessee's own funds. This principle was upheld by the Supreme Court. Therefore, the Tribunal directed the deletion of the disallowance of interest expenditure, citing previous similar findings in the assessee's favor.

4. Conclusion:
The Tribunal allowed the assessee's appeal, emphasizing that no disallowance of interest could be made when the assessee's own funds exceeded the investments generating tax-free income. The Tribunal highlighted the importance of recording satisfaction before applying Rule 8D and reiterated the principle that investments from own funds do not warrant disallowance of interest. The decision was in line with previous rulings and the recent Supreme Court judgment, leading to the deletion of the disallowance.

This detailed analysis outlines the key arguments, facts, and the Tribunal's decision regarding the challenge to the disallowance under section 14A read with Rule 8D(2)(ii) on account of interest in the given legal judgment.