2020 (10) TMI 134 - AT - Income Tax

Disallowance u/s 14A - assessee earned exempt income but did not make any disallowance u/s 14A - assessee submitted that the majority of its investments were made in the earlier years and further the loans taken during the year under consideration were used for general business purposes - HELD THAT - If the interest free funds available with the assessee is more than the value of investments, then the presumption is that the assessee has used interest free funds for making investments. This view is supported by the decision rendered in the case of Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT . There should not be any dispute that, if the assessee is able to demonstrate that the interest free funds available with the assessee is more than the value of investments and further the loan funds have not been used to make the investments, then no disallowance out of interest expenditure is called for under rule 8D(2)(ii). Since the factual details relating to the issue require examination, we are of the view that the assessee, in the interest of natural justice, should be provided with an opportunity to present its case to the A.O. With regard to the disallowance of administrative expenses made under rule 8(D)(iii), it is the submission of the assessee that the majority of expenses debited to Profit loss account are not related to the exempt income and further the expenses relatable to the exempt income could be identified and the same is lower than the amount computed by the A.O. u/r 8D(2)(iii). This contention of the assessee also require examination at the end of the A.O. This issue requires fresh examination at the end of the A.O. Assessee appeal allowed for statistical purposes.

Summary

Issues:
1. Disallowance made under section 14A of the Income-tax Act, 1961 for assessment years 2013-14 and 2015-16.

Analysis:
1. Assessment Year 2013-14:
- The assessee earned exempt income of ?4.19 crores but did not make any disallowance under section 14A of the Act.
- The Assessing Officer (A.O.) made a disallowance of ?52.10 crores under section 14A, consisting of interest disallowance and expenditure disallowance under rule 8D of the Income Tax Rules.
- The assessee challenged the addition before the Commissioner of Income Tax Appeals (CIT(A)), who directed the A.O. to restrict the disallowance to the extent of exempt income earned by the assessee.
- During the hearing, the assessee argued that investments were made from interest-free funds and certain dividend income was not received, thus impacting the computation of average value of investments.
- The A.O. mechanically computed the expenditure disallowance without considering the actual expenses incurred by the assessee.
- The Tribunal set aside the CIT(A)'s order and restored the issue to the A.O. for fresh examination.

2. Assessment Year 2015-16:
- The assessee did not voluntarily make any disallowance under section 14A for the earned dividend income of ?92,56,000.
- The A.O. disallowed ?29,23,212 under section 14A, comprising interest and expenditure disallowance under rule 8D.
- The CIT(A) upheld the disallowance, leading to the assessee appealing the decision.
- The Tribunal, considering the identical facts with the previous assessment year, set aside the CIT(A)'s order and remanded the issue to the A.O. for fresh examination.

Conclusion:
Both appeals of the assessee and the revenue were treated as allowed for statistical purposes. The Tribunal emphasized the need for a detailed examination by the A.O. regarding the disallowances made under section 14A for both assessment years, directing a fresh assessment based on the specific circumstances and contentions presented by the assessee.