2023 (11) TMI 31 - AT - Income Tax

Disallowance u/s 14A r.w Rule 8D - mandation of recording satisfaction - addition made as assessee did not establish the nexus between interest free funds and investment yielding exempt income - CIT(A) deleted the addition - HELD THAT - It is not in dispute that the assessee on its own made disallowance u/s 14A - as observed that the AO has not recorded his satisfaction regarding correctness of self disallowance made by the assessee under section 14A as is mandatory in terms of sub-section (2) of section 14A to invoke and take recourse to Rule 8D. In such a scenario as held in Pr. CIT vs. Keshav Power Ltd. 2019 (8) TMI 811 - SC ORDER that disallowance is not sustainable. The Revenue filed SLP before the Hon ble Supreme Court against the order (supra) of the Hon ble Delhi High Court which stands dismissed reported. 2018 (11) TMI 645 - DELHI HIGH COURT . Similar is the view expressed in Pr. CIT vs. Reliance Capital Asset Management Ltd. 2018 (9) TMI 883 - SC ORDER - Moreover, CIT(A) recorded the finding that sufficient own funds were available with the assessee to make investment in shares on which no interest was being paid and that interest bearing funds were utilised only for purposes of business. The above finding could not be controverted by bringing on record any material by the Ld. DR. If that be so, the decision of South Indian Bank Ltd. 2021 (9) TMI 566 - SUPREME COURT squarely applies to the facts of the assessee s case wherein it is held that if interest free funds available with the assessee exceeded their investment in tax free securities, investments would be presumed to be made out of assessee s own funds and no disallowance is warranted. It may be stated that there is no requirement of law either under section 14A or Rule 8D that the assessee should establish nexus between interest free funds and investment which yields exempt income. Decided in favour of assessee.

Summary

Issues involved:
The appeal involves the disallowance of Rs. 10,47,30,878/- made under section 14A r.w Rule 8D by the Ld. Assessing Officer for Assessment Year 2015-16. The main issue is whether the assessee established the nexus between interest-free funds and investment yielding exempt income.

Details of the Judgment:

Issue 1: Disallowance under section 14A r.w Rule 8D

The assessee, engaged in engineering services, filed its return for AY 2015-16 declaring a loss. The Ld. AO found investments in unquoted trade instruments in subsidiaries, joint ventures, and SPVs. The AO required the assessee to show cause for not making disallowance under section 14A r.w. Rule 8D. The assessee contended no exempt income was earned, and investments were made from own funds, not borrowed funds. The Ld. AO computed disallowance of Rs. 10,47,30,878/- and added it to the income. The Ld. CIT(A) directed deletion of the disallowance, citing the availability of sufficient own funds for investments and reliance on relevant case laws.

Issue 2: Appeal before the Tribunal

The Revenue appealed before the Tribunal, arguing that the assessee did not establish the nexus between interest-free funds and investment yielding exempt income. The Ld. AR supported the Ld. CIT(A)'s order, referencing relevant Supreme Court decisions. The Tribunal noted that the assessee self-disallowed Rs. 4,44,270/- under section 14A but the Ld. AO did not record satisfaction for invoking Rule 8D. Citing precedents, the Tribunal held that disallowance was not sustainable, as the assessee had sufficient own funds for investments and no nexus proof was required by law.

Conclusion:
The Tribunal endorsed the Ld. CIT(A)'s findings, rejecting the Revenue's appeal and dismissing it. The decision was pronounced in open court on 30th October 2023.