2020 (9) TMI 234 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - claim made by the assessee company of having not incurred any expenditure to earn exempt income - HELD THAT - As rightly contended by assessee, there was a presumption that the investment capable of yielding exempt income was made by the assessee company out of its own interest free funds and there was no utilization of interest bearing borrowed funds for making such investment so as to warrant any disallowance of interest u/s 14A. This contention for the assessee is duly supported by the decision of Hon ble Jurisdictional High Court in the case of CIT Vs. Reliance Utilities Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT wherein it was held that if the assessee had interest free funds of its own which were more than the investment capable of earning exempt income, it could be presumed that the said investments were made from interest free funds available with the assessee and not from the interest bearing borrowed funds so as to warrant the disallowance u/s 14A . Since the interest free funds of its own funds available with the assessee company in the form of share capital and free reserves were substantially more than the corresponding investments made as noted by us, we are of the view that the disallowance made by the AO and confirmed by the Ld. CIT(A) on account of interest u/s 14A of the Act read with rule 8D(2)(ii) of the Rules is not sustainable and the same is directed to be deleted. Disallowance made u/s 14A of the Act on account of common administrative expenses by applying rule 8D(2)(iii) - Once the claim of assessee of having not incurred any common expenses in relation to the earning of exempt income is found to be not correct and the disallowance u/s 14A on account of such expenses is liable to be worked out by applying the formula given in rule 8D(2)(iii) of the Rules, the basis given therein cannot be altered or changed as sought by assessee, unless and until the basis so given in the formula is found to be patently untenable in the facts and circumstances of a particular case - No merit in this contention of the assessee and reject the same. The issue raised by the assessee relating to the disallowance u/s 14A of the Act read with rule 8D of the Rules as raised partly allowed. Education cess and secondary and high education cess - allowed as a deduction while computing the total income of the assessee - Admission of additional ground - HELD THAT - Respectfully following the decision of the Hon ble Jurisdictional High Court in the case of Sesa Goa Ltd. 2020 (3) TMI 347 - BOMBAY HIGH COURT we admit the additional ground raised by the assessee and allow the same on merit by directing the Assessing Officer to allow the deduction to the assessee company while computing its total income on account of education cess and secondary and high education cess.

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income-tax Act, 1961.
2. Objective satisfaction not recorded by the Assessing Officer.
3. Availability of own funds versus borrowed funds for tax-free investments.
4. Disallowance of indirect expenditure.
5. Investment in partnership firms and its tax implications.
6. Additional ground regarding deduction of education cess and secondary and high education cess.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The main issue in this appeal is the disallowance of ?1,06,67,279/- under Section 14A of the Income-tax Act, 1961, read with Rule 8D of the Income-tax Rules, 1962. The disallowance was made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].

2. Objective Satisfaction Not Recorded by AO:
The assessee argued that the AO did not record objective satisfaction to demonstrate that the claim made by the assessee of not incurring any expenditure to earn exempt income was incorrect. The CIT(A) dismissed this argument, stating that the AO followed the provisions of Rule 8D(2)(ii), which mandates disallowance if the assessee fails to prove no interest was incurred for earning exempt income.

3. Availability of Own Funds Versus Borrowed Funds:
The assessee contended that it had sufficient interest-free funds (?271.85 crores) to make the investments (?173.77 crores) that earned tax-free income, relying on the Bombay High Court's decision in CIT Vs. Reliance Utilities & Power Ltd. The Tribunal agreed with the assessee, stating that there was a presumption that the investments were made from the assessee's own funds, not borrowed funds. Therefore, the disallowance of interest expenditure under Section 14A was not sustainable.

4. Disallowance of Indirect Expenditure:
The AO disallowed ?82,41,026/- under Rule 8D(2)(iii) for indirect expenditure incurred to earn exempt income. The assessee argued that the major exempt income was from the share of profit from partnership firms, which did not require any expenditure. The Tribunal found that common administrative expenses were partly attributable to earning exempt income, including the share of profit from the partnership firm. Therefore, the disallowance of indirect expenditure was justified.

5. Investment in Partnership Firms:
The assessee argued that investments in partnership firms should be excluded from 'tax-free investments' for computing disallowance under Rule 8D, as the income earned by the firm is subjected to income tax. The Tribunal rejected this argument, stating that the formula in Rule 8D(2)(iii) could not be altered unless found patently untenable.

6. Additional Ground: Deduction of Education Cess:
The assessee raised an additional ground for the deduction of education cess and secondary and high education cess amounting to ?20,37,889/-. The Tribunal admitted this additional ground and allowed the deduction, following the Bombay High Court's decision in Sesa Goa Ltd. Vs. JCIT, which held that 'cess' is not included in Section 40(a)(ii) and is therefore deductible.

Conclusion:
The Tribunal partly allowed the appeal, deleting the disallowance of interest expenditure under Section 14A read with Rule 8D(2)(ii) but upheld the disallowance of indirect expenditure under Rule 8D(2)(iii). Additionally, the Tribunal allowed the deduction for education cess and secondary and high education cess.

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