2019 (6) TMI 703 - AT - Income Tax

Disallowance u/s 14A - sufficiency of own funds - HELD THAT - The value of investments held by the assessee as at the beginning and end of the year was 2.60 crores and 10 lakhs respectively. Admittedly the own funds available with the assessee is more than value of investments and hence as per the decision rendered in the case of HDFC Bank Ltd. 2016 (3) TMI 755 - BOMBAY HIGH COURT no disallowance out of interest expenditure is called for. Accordingly we set aside the order passed by the CIT(A) on this issue and direct the AO to delete the disallowance made in Rule 8D(2)(ii) out of interest expenditure. We notice that the assessee has held units in ICICI prudential Liquid fund to the tune of 2.60 crores as at the beginning of the year and the same has been sold during the year under consideration. Further, during the year under consideration, the assessee has also made fresh investment of 10 lakhs in its subsidiary named M/s Clinigene International Ltd. The assessee has also received dividend income of 114.95 crores during the year under consideration. Thus, we notice that there has been certain amount of activities in the investment portfolio of the assessee. The above said activities, could not have been undertaken without using the establishment of the assessee. Not be practicable to apply provision of Rule 8D(2)(iii) but at the same time some disallowance is called for out of administrative expenses for the reasons mentioned above. Accordingly, a disallowance of ₹ 10,000/- out of administrative expenses may be estimated to take care of provisions of Section 14A and the same would put this issue at rest. We direct the AO to make disallowance of ₹ 10,000/- out of administrative expenses u/s 14A. Appeal filed by the assessee is partly allowed.

Summary

Issues:
1. Disallowance under section 14A of the Act for interest and administrative expenses.

Analysis:
The appeal before the Appellate Tribunal ITAT Bangalore pertained to the disallowance made by the Assessing Officer under section 14A of the Income Tax Act, which was confirmed by the CIT(A). The assessee, engaged in manufacturing organic compounds and research activities, received dividend income during the relevant year and claimed it as exempt. The AO disallowed interest and administrative expenses under Rule 8D, resulting in a total disallowance of ?3,08,428. The CIT(A) upheld this disallowance, leading to the appeal.

Regarding the disallowance of interest expenses, the assessee argued that no disallowance should be made as it had own funds exceeding the value of investments, citing a decision of the Bombay High Court. The Tribunal reviewed the financial statements and noted the substantial own funds compared to investment value. Relying on the Bombay High Court's decision in another case, the Tribunal held that no disallowance of interest expenditure was warranted, directing the AO to delete the disallowance made under Rule 8D(2)(ii).

Concerning the disallowance of administrative expenses, the assessee contended that since the dividend income was earned from mutual funds without any additional expenses, no disallowance should apply. The Tribunal examined the investment activities and observed that certain activities necessitated the use of the assessee's establishment. While Rule 8D(2)(iii) was deemed impracticable, the Tribunal acknowledged the need for some disallowance. Therefore, a disallowance of ?10,000 out of administrative expenses was estimated to comply with section 14A, overturning the CIT(A)'s decision.

In conclusion, the Tribunal partially allowed the appeal, directing the AO to delete the disallowance of interest expenses and make a disallowance of ?10,000 for administrative expenses under section 14A of the Act.