2023 (1) TMI 70 - HC - Income Tax

Disallowance u/s 14A r.w.r. 8D - assessee had earned tax free dividend income during the year under consideration that needed to be apportioned - HELD THAT - A perusal of the paper book reveals that the AO rejected the assessee company s computation on the ground that the assessee company had raised substantial amount of loans for investment in new ventures on which substantial amount of interest was paid . Appellate Authorities below held that the investments were made out of assessee s own funds and no borrowed funds were used to acquire investments. There was no interest expenditure which could be directly or indirectly attributed to the exempt income. Appellate Authorities upheld the suo moto disallowance made by the assessee after taking 20% of employee cost and 5% of the administrative cost. The Supreme Court in South India Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT has held that where the assessee has mixed funds (made up partly of interest free funds and partly of interest bearing funds) and the payment is made out of mixed fund the investment must be considered to have been made out of the interest free fund. CIT(A) deleted the additions u/s 32 based on documents which were duly submitted to the AO as well as CIT(A). CIT (A) duly considered the documents on record and after the verification of the evidence rightly deleted the addition. ITAT has even recorded that the details were submitted by the assessee during the assessment proceedings as per the reply/submissions dated 11th December 2012 which is mentioned at page 1 of the assessment order itself. ITAT has also recorded that there was no new evidence brought on record by the assessee and in fact the AO has totally ignored the reply dated 11th December 2012 filed by the Assessee. Both the appellate authorities below have recorded concurrent findings of fact on both the issues.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Disallowance under Section 32 of the Act based on documentary evidence.

Analysis:

Issue 1: Disallowance under Section 14A of the Income Tax Act, 1961
The appellant challenged the ITAT's order regarding the disallowance of Rs.4,74,88,156 under Section 14A of the Act. The contention was that the assessee had earned tax-free dividend income of Rs.4,63,01,246 during the relevant year, which needed to be apportioned. The ITAT was criticized for not appreciating this fact. However, the appellate authorities below found that the investments were made out of the assessee's own funds, and no borrowed funds were used for acquisitions. Consequently, they upheld the suo moto disallowance of Rs.16,05,000 made by the assessee. The Supreme Court precedent highlighted the right of appropriation for investments made out of mixed funds, emphasizing that the assessee has the right to assert from which part of the fund a particular investment is made.

Issue 2: Disallowance under Section 32 of the Act based on documentary evidence
The appellant contested the ITAT's decision to delete the disallowance of Rs.19,39,69,553 under Section 32 of the Act, citing that the documentary evidence was not submitted before the Assessing Officer as required by Rule 46(3) of the Rules. However, the Commissioner of Income Tax (Appeals) and the ITAT found that the documents were duly submitted during the assessment proceedings. The CIT(A) considered the evidence and deleted the addition, noting that no new evidence was presented later. The ITAT also observed that the AO ignored the submissions filed by the Assessee. Both appellate authorities reached concurrent findings of fact on these issues, leading the Court to conclude that no substantial question of law arose for consideration, resulting in the dismissal of the appeal.

In conclusion, the High Court upheld the decisions of the appellate authorities, emphasizing the importance of evidence submission and the right of appropriation for investments made out of mixed funds. The judgment highlights the significance of following procedural rules and presenting all relevant evidence during assessment proceedings to avoid disallowances under the Income Tax Act.