2023 (12) TMI 641 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - AO categorically noted that as assessee has investment in mutual funds such investment cannot be made without incurring any expenditure - HELD THAT - Merely, the dividend income is received in the bank account of the assessee but the disallowance of investment also requires expenditure. In view of this, we find that the AO has recorded satisfaction before invoking the provisions of Rule 8D of the Rules about the correctness of claim of the assessee. However, we agree with the assessee that the disallowance cannot be exceeded the exempt income earned by the assessee. In the present case, it is also claimed by the assessee that it has interest free funds available with it in the form of share capital and free reserve, which are far in excess of the amount of investment made in Mutual Fund. For A.Y. 2016-17, assessee has fund of ₹81 crores as share capital and free reserves whereas the investment in Mutual Funds is only ₹15.60 crores. Therefore, there cannot be any disallowance of interest expenditure under Rule 8D (2)(ii) of the Rules. Accordingly, interest disallowance made by the learned Assessing Officer for A.Y. 2016-17 of ₹21,92,534/- is not sustainable. Further, the administrative expenditure disallowed of ₹7,28,155/- is far more excess than the amount of exempt income earned by the assessee of ₹53,873/-. Therefore, we direct the learned Assessing Officer to restrict the disallowance u/s 14A of the Act for A.Y. 2016-17 to only ₹53,873/-. Coming to the A.Y. 2017-18, it apparent that assessee has earned exempt income of ₹7,59,432/-. Assessee has also issued suo moto disallowance of Demat charges and security transaction tax. However, the learned Assessing Officer computed annual average of monthly averages of the investment made at ₹11,09,38,464/- and therefore, disallowed at 1% thereof at ₹11,09,300/-.We direct the ld AO to compute the disallowance u/r 8 D considering only the on the investment which yielded exempt income during the year. Further, the computational error stated by the Ld AR also needs to be verified. Further disallowances in total including demat charges and STT paid cannot exceed the exempt income. We direct the LD AO to recompute the disallowance accordingly. Applicability of Amendment made by the Finance Act 2022 , we respectfully following the decision of Honourable Delhi high court in Era Infrastructure limited 2022 (7) TMI 1093 - DELHI HIGH COURT hold that Amendment made by Finance Act, 2022 to section 14A by inserting a non-obstante clause and Explanation will take effect from 1-4-2022 and cannot be presumed to have retrospective effects. We allow both the appeals of the assessee and direct the ld AO to recompute disallowance.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Validity and applicability of Rule 8D.
3. Consideration of short-term investments in disallowance.
4. Retrospective applicability of the amendment to Section 14A by the Finance Act, 2022.
5. Confirmation of disallowance amounts by the CIT (A).

Summary:

Issue 1: Disallowance under Section 14A read with Rule 8D:
The assessee contested that no expenses were debited in the Profit & Loss Account related to non-taxable income, arguing that Section 14A(2) requires the Assessing Officer (A.O) to be dissatisfied with the correctness of the assessee's claim before determining the expenditure under Rule 8D. The A.O rejected the explanation, stating that some expenditure is always attributable to earning exempt income and computed disallowance accordingly. The Tribunal found that the A.O recorded satisfaction before invoking Rule 8D but agreed with the assessee that disallowance cannot exceed the exempt income earned. For A.Y. 2016-17, the Tribunal directed the A.O to restrict disallowance to Rs. 53,873/-, and for A.Y. 2017-18, to recompute disallowance considering only the investments yielding exempt income.

Issue 2: Validity and applicability of Rule 8D:
The CIT (A) upheld the disallowance under Rule 8D, stating its validity was upheld by higher courts. The Tribunal noted that the A.O correctly recorded satisfaction before applying Rule 8D but emphasized that disallowance should not exceed the exempt income.

Issue 3: Consideration of short-term investments in disallowance:
The assessee argued that short-term investments, which are taxable, were wrongly included in the disallowance computation. The Tribunal directed the A.O to consider only investments yielding exempt income for disallowance under Rule 8D.

Issue 4: Retrospective applicability of the amendment to Section 14A by the Finance Act, 2022:
The assessee argued that the amendment to Section 14A by the Finance Act, 2022, should not be presumed retrospective. The Tribunal, following the Delhi High Court decision in Era Infrastructure Limited, held that the amendment is effective from 1-4-2022 and cannot be presumed to have retrospective effects.

Issue 5: Confirmation of disallowance amounts by the CIT (A):
The CIT (A) confirmed the disallowance amounts made by the A.O. The Tribunal directed the A.O to recompute the disallowance for both assessment years, ensuring it does not exceed the exempt income and considering only the investments yielding exempt income.

Conclusion:
The Tribunal allowed both appeals of the assessee, directing the A.O to recompute the disallowance as indicated, ensuring it does not exceed the exempt income and considering only investments yielding exempt income. The amendment to Section 14A by the Finance Act, 2022, was held not to have retrospective effect.