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2023 (1) TMI 713 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - Working of expenses attributable to exempt income as per Rule 8D - HELD THAT - No interest disallowance is warranted under Rule 8D(2)(i) in the year under consideration. As further observed that in the immediately preceding year 2010-11, a sum of Rs. 1,71,87,853/- was disallowed under Rule 8D(2)(iii) which stands deleted by the Tribunal vide its order 2021 (11) TMI 1134 - ITAT DELHI on the basis of the facts pertaining to that year. In the AY under consideration the assessee submitted working of disallowance on taxable investment under Rule 8D(2)(iii) amounting to Rs. 23,75,000/- before the Ld. CIT(A). Since the assessee had already made disallowance of Rs. 8,89,763/- suo-moto out of administrative expenses incurred, it offered disallowance of Rs. 14,85,237/- under section 14A r.w. Rule 8D which has been accepted by the Ld. CIT(A). Having gone through the facts and circumstances of the assessee s case and the decision of the Hon ble Supreme Court in Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT relied upon by the Tribunal in the preceding year and the decisions in M/s. Cheminvest Ltd. 2009 (8) TMI 126 - ITAT DELHI-B AND Holcim India (P) Ltd. 2014 (9) TMI 434 - DELHI HIGH COURT followed by the Ld. CIT(A), we do not find any infirmity in the order of the Ld. CIT(A) which we uphold. Consequently, we reject the appeal of the Revenue.
Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961. 2. Validity of the Assessing Officer's computation of expenses attributable to exempt income. 3. Acceptance of revised working of disallowance by the Commissioner of Income Tax (Appeals) [CIT(A)]. 4. Applicability of precedents and judicial decisions in determining disallowance. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D: The primary issue revolves around the disallowance of expenses related to exempt income under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962. The assessee, a company engaged in power generation, declared an income of Rs. 2,36,13,611/- for AY 2011-12 and claimed Rs. 7,62,44,036/- as exempt income from dividends on mutual funds/shares. The Assessing Officer (AO) found the assessee's suo-moto disallowance of Rs. 8,89,763/- under Section 14A insufficient and computed the expenses attributable to exempt income as per Rule 8D at Rs. 7,76,51,949/-. This was later rectified to Rs. 2,23,87,932/-. 2. Validity of the Assessing Officer's Computation: The AO's computation was based on the formula provided under Rule 8D, which included: - Expenses directly attributable to exempt income: Rs. Nil. - Formula: A X B / C, where A is the interest expenses, B is the average value of investments, and C is the average value of assets. - 0.5% of the average value of investments. The AO initially computed disallowance at Rs. 7,76,51,949/-, later rectified to Rs. 2,23,87,932/-. The assessee contested this, arguing that investments were made from its own funds and not borrowed capital, and provided a revised working showing a disallowance of Rs. 23,75,000/-. 3. Acceptance of Revised Working by CIT(A): The CIT(A) accepted the assessee's revised working of disallowance under Section 14A r.w. Rule 8D, which was Rs. 23,75,000/-. The CIT(A) noted that the investments were made in subsidiary companies for strategic purposes and no dividend income was received in the relevant assessment year. The CIT(A) referred to the jurisdictional High Court's decision in M/s Cheminvest Limited vs. CIT, which held that no disallowance under Section 14A is warranted when no exempt income is earned. Consequently, the CIT(A) directed the AO to make a disallowance of Rs. 14,85,237/- (Rs. 23,75,000/- minus Rs. 8,89,763/- already disallowed by the assessee). 4. Applicability of Precedents and Judicial Decisions: The Revenue challenged the CIT(A)'s decision, arguing that the dominant purpose of investment is irrelevant as per the Supreme Court's decision in Maxopp Investment Ltd. vs. CIT. The Revenue contended that disallowance under Rule 8D applies even if no exempt income is earned. The Tribunal, however, upheld the CIT(A)'s order, referencing the assessee's own case in AY 2010-11, where a similar issue was decided in favor of the assessee. The Tribunal also cited the Supreme Court's decision in Reliance Industries Ltd., which held that investments made from interest-free funds should not attract disallowance under Section 14A. Conclusion: The Tribunal concluded that no interest disallowance was warranted under Rule 8D(2)(i) and upheld the CIT(A)'s order restricting the disallowance to Rs. 23,75,000/-. The appeal of the Revenue was dismissed, and the Tribunal found no infirmity in the CIT(A)'s order. The decision was pronounced in the open court on 5th January 2023.
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