2020 (2) TMI 91 - AT - Income Tax

Disallowance u/s 14A - HELD THAT - During the year under consideration, there is no increase in the investment in mutual funds but there is a substantial decrease in the investment in mutual funds. The A.O. in the remand report has not given any factual finding and has stated that the documentary evidence produced by the assessee was considered by the A.O. during the assessment proceedings and consequently he does not find anything contrary to the order of the A.O Disallowance made on account of administrative expenses - A.O. in the remand report has not given any finding on the facts and the evidence produced by the assessee but simply stated that I do not find anything contrary to the order of the A.O. Such remand report would not serve any purpose and particularly when the matter was specifically remanded to the record of the ld. CIT(A) for giving the A.O. an opportunity to examine the evidence filed by the assessee. Hence, in view of the above facts and circumstances, we do not find any error in the impugned order of the ld. CIT(A) to the extent of sufficiency of the assessee s own funds for making investment in the mutual funds. Disallowance sustained by the ld. CIT(A) towards the administrative expenses as per Rule 8D(2)(iii) of the Rules - CIT(A) has restricted the said disallowance to the amount of dividend income - identical issue has been considered by this Tribunal in assessee s own case 2019 (4) TMI 192 - ITAT JAIPUR - CIT(A) has also followed the order of the Tribunal while restricting the disallowance U/s 14A read with Rule 8D(2)(iii) of the Rules and hence we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue. Disallowance made u/s 36(1)(iii) of the Act on account of interest expenditure in respect of OD account - HELD THAT - CIT(A) has considered the fund flow position of the assessee and thereby come to the conclusion that the total interest expenses on OD account was ₹ 49,197/-. In view of the above facts and circumstances of the case when the A.O. has not given any finding in the remand report, we do not find any error or illegality in the impugned order of the ld. CIT(A) qua this issue

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Disallowance under Section 36(1)(iii) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:

The primary issue in this case revolves around the disallowance made by the Assessing Officer (A.O.) under Section 14A of the Income Tax Act, 1961. The A.O. initially disallowed ?2,76,51,752, which was later restricted to ?16,51,186 by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Revenue challenged the reduction, while the assessee contested the sustained disallowance.

The assessee argued that it had sufficient interest-free funds for making investments in mutual funds and provided evidence to support this claim. The CIT(A) had earlier sent the evidence to the A.O. for examination, who failed to point out any mistakes or defects in the records produced by the assessee. The A.O. maintained that the assessee used its Over Draft (OD) Account for the investments, implying the use of borrowed funds. However, the balance sheet indicated a decrease in mutual fund investments from ?60.20 crores to ?11.94 crores, which was not disputed by the Revenue.

The Tribunal noted that the A.O. did not provide any factual findings in the remand report and merely reiterated the assessment order. The Tribunal upheld the CIT(A)'s decision, emphasizing the sufficiency of the assessee's own funds for the investments.

Regarding administrative expenses, the CIT(A) restricted the disallowance to the amount of dividend income, following the Tribunal's precedent in the assessee's own case for the A.Y. 2010-11. The Tribunal found no error in this approach, as it aligned with the principle that disallowance under Section 14A read with Rule 8D(2)(iii) should not exceed the exempt income.

2. Disallowance under Section 36(1)(iii) of the Income Tax Act, 1961:

The second issue pertains to the disallowance of interest expenditure under Section 36(1)(iii). The A.O. disallowed ?4,52,338, applying a 10% interest rate on the total OD amount of ?45,23,383. The CIT(A) restricted this disallowance to ?49,197, which was the actual interest expenditure on the OD account.

The assessee contended that it had sufficient own funds for the investments, and the interest expenditure on the OD facility should not be attributed to mutual fund investments. The Tribunal noted that the CIT(A) had called for a remand report from the A.O., who again failed to provide specific details or findings. The CIT(A) examined the fund flow position and concluded that the total interest expenses on the OD account were ?49,197.

The Tribunal found no reason to interfere with the CIT(A)'s order, as the A.O. did not provide any factual findings in the remand report. The Tribunal upheld the CIT(A)'s decision, emphasizing the sufficiency of the assessee's own funds and the correct calculation of interest expenses.

Conclusion:

The Tribunal dismissed both the Revenue's and the assessee's appeals, upholding the CIT(A)'s decisions on both disallowance issues under Sections 14A and 36(1)(iii) of the Income Tax Act, 1961. The order was pronounced in the open court on 31st January 2020.

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