2022 (7) TMI 782 - AT - Income Tax

Disallowance u/s 14A r.w.r.8D - disallowance of interest - assessee submitted that, in respect of the disallowance of interest is concerned, the investment in shares and mutual funds were made by the assessee out of its own fund. There is no increase in investment yielding tax free income. There is no increasing investment rather there was a huge decrees - HELD THAT - We find that, when the assessee had huge reservation and surplus fund which is non interest bearing fund, there cannot be disallowance of interest under Rule 8D(2). The similar issue has come up for consideration by the Tribunal in assessee s own case and the same have been decided in favour of the assessee for the AY 2012-13 2020 (2) TMI 1647 - ITAT DELHI wherein as held that invocation o f sub-Section (2) of Section 14A is conspicuously absent and hence re-computation of the disallowance is not legally valid. And considering the investments in mutual funds and in shares are through PMS, hardly any expense is incurred. As such the estimated disallowance made by assessee suo-moto is reasonable as it meets the expenses on account of STT as well as in direct expenses. Hence, we hereby hold that no additional disallowance is called for by invoking Rule 8D - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of interest under section 14A r.w Rule 8D(2)(ii)
2. Disallowance of prorata interest expenses under section 14A
3. Upholding of disallowance by CIT(A) without appreciating submissions
4. Assessment and order against law and facts

Analysis:
1. The appeal was filed against the order passed by CIT(A) upholding the disallowance of interest under section 14A r.w Rule 8D(2)(ii) made by the Assessing Officer. The assessee argued that no disallowance should be made as the investments were made out of its own funds, and there was no increase in investments yielding tax-free income. The Tribunal held that when the assessee had huge non-interest bearing funds, no disallowance of interest under Rule 8D(2) could be made. The Tribunal referred to previous decisions in favor of the assessee for AY 2012-13 and 2013-14, where it was held that Rule 8D is not mandatory, and no additional disallowance is warranted.

2. The issue of disallowance of prorata interest expenses under section 14A was also raised. The assessee contended that the disallowance was not justified as there were substantial own funds and cash profits far exceeding tax-free investments. The Tribunal noted that the disallowance was not valid as the invocation of sub-Section (2) of Section 14A was absent, and re-computation of disallowance was not legally valid. The Tribunal held that no additional disallowance was necessary, following the decisions in previous years' cases.

3. The CIT(A) upheld the disallowance without appreciating the submissions of the assessee. However, the Tribunal found in favor of the assessee based on the previous decisions and the absence of legal validity in the re-computation of disallowance. The Tribunal allowed the assessee's grounds of appeal for the relevant assessment year.

4. The assessment and order were challenged as being against the law and facts of the case. The Tribunal, after considering the submissions of both parties and previous decisions, allowed the appeal of the assessee for the Assessment Year 2015-16. The order was pronounced in favor of the assessee on 5th July 2022.