2022 (4) TMI 20 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D(2)(ii) and 8D(2)(iii) on account of expenditure incurred for earning of tax exempt income - HELD THAT - As decided in SOUTH INDIAN BANK LTD. VERSUS COMMISSIONER OF INCOME TAX 2021 (9) TMI 566 - SUPREME COURT the proportionate disallowance of interest is not warranted under Section 14A of Income Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free/own funds available with the Assessee, exceeded the investments. As Hon ble Supreme Court in the case of CIT (LTU) vs. Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT wherein it has been held that if the assessee is possessed of sufficient interest free funds to meet the investments, then, under the circumstances presumption will be that the interest free advances/investments have been made by the assessee out of owned funds/interest free funds. In view of above discussion, no disallowance is attracted on account of interest expenditure u/s 14A of the Act read with Rule 8D(2)(ii) of the I. T. Rules. Disallowance of administrative expenditure u/s14A of the Act read with Rule 8D(2)(iii) the issue is squarely covered by the decisions of the Hon ble Delhi High Court in the case of Joint Investments Private Ltd 2015 (3) TMI 155 - DELHI HIGH COURT and further in the case of ACB India Limited vs. ACIT 2015 (4) TMI 224 - DELHI HIGH COURT wherein it has been held that for computing the average value of investment u/s 14A of the Act read with rule 8D(2)(iii), only the investment yielding non-taxable income have to be considered and not the entire investment. In view of this, the Assessing Officer is directed, accordingly, to consider only the investments yielding tax exempt income for computation of disallowance under Rule 8D(2)(iii) of the I.T. Rules. In view of the above discussion, the impugned order of the CIT(A) is set aside. Appeal of the assessee stands partly allowed.

Summary

Issues:
Validity of disallowance made/confirmed under Section 14A read with Rule 8D(2)(ii) and 8D(2)(iii) of the Income Tax Act.

Analysis:
The appeal was filed against the order of the National Faceless Appeal Centre regarding the disallowance made under Section 14A read with Rule 8D(2)(ii) and 8D(2)(iii) of the Income Tax Act. The main contention raised was the validity of the disallowance concerning the expenditure incurred for earning tax-exempt income. The assessee argued that they had sufficient owned funds to meet the investments, supported by the balance sheet showing share capital and reserves. The assessee also cited relevant case law, including a decision of the Supreme Court. The Departmental Representative failed to provide any contrary legal position. The Tribunal noted that the issue was covered by a Supreme Court decision which held that no disallowance is warranted if the interest-free/own funds available with the assessee exceeded the investments. The Tribunal also referred to other Supreme Court decisions supporting this principle. Therefore, no disallowance was attracted under Section 14A read with Rule 8D(2)(ii) of the IT Rules.

Regarding the disallowance under Section 14A read with Rule 8D(2)(iii), the assessee contended that only investments yielding tax-exempt income should be considered for calculating the disallowance. The assessee relied on a Tribunal decision and the Departmental Representative relied on lower authorities' findings. The Tribunal referred to decisions of the Delhi High Court, which held that only investments yielding non-taxable income should be considered for the computation of disallowance under Rule 8D(2)(iii). Consequently, the Assessing Officer was directed to consider only investments yielding tax-exempt income for the calculation of disallowance under Rule 8D(2)(iii). As a result, the appeal of the assessee was partly allowed, and the order of the CIT(A) was set aside.

In conclusion, the Tribunal's judgment clarified the principles regarding disallowance under Section 14A read with Rule 8D(2)(ii) and 8D(2)(iii) of the Income Tax Act, emphasizing the importance of owning sufficient funds to meet investments and considering only investments yielding tax-exempt income for the disallowance calculation.