2021 (4) TMI 325 - AT - Income Tax

Disallowance by invoking the provisions of Section 14A r.w. Rule 8D(2)(ii) and 8D(2)(iii) - HELD THAT - The management of the assessee is involved in taking a decision with regard to investment in exempted income. This investment decision is very strategic which resulted in incurring of various administrative expenses. The assessee cannot take a plea that the assessee has not incurred any administrative expenditure to take such strategic decision of making investment in exempted income yielded assets. The disallowance made by the AO under Rule 8D(2)(iii) is justified and thus the disallowance is confirmed. However coming to the disallowance under Rule 8D(2)(ii), it is indirect interest expenditure. The contention of the assessee is that the assessee is having interest free funds in the form of reserves and surplus and no part of interest bearing funds were used for making these investments which yielded exempted income. The availability of interest free funds in the year of investment has not been demonstrated by the assessee before the lower authorities by producing the relevant financials which shows that there was actually interest free funds available with the assessee. It is the duty of the assessee to prove that no interest bearing funds were utilized for investment in these assets which yielded exempted income. The assessee has to file necessary fund / cash flow statements with the lower authorities as on date of making investments which had given rise to exempted income. If there is actual availability of the interest free funds as on date of making the investment, there cannot be any disallowance under Section 14A r.w. Rule 8D(2)(ii) of the I.T. Rules. In the interest of justice, we deem it appropriate to remand this issue to the file of Assessing Officer for fresh consideration. If the assessee proves that there is availability of interest free funds for making these investments by producing necessary fund/cash flow statements for the respective year of investment, the claim of the assessee is to be allowed. With these observations, we remit this issue of disallowance u/s. 14A r.w. Rule 8D(2)(ii) of the I.T. Rules to the file of Assessing Officer for fresh consideration. Appeal of the assessee is partly allowed for statistical purposes.

Summary

Issues:
Condonation of delay in filing the appeal before the Tribunal. Disallowance of expenses under Section 14A r.w. Rule 8D of the Income Tax Act for Assessment Year 2013-14.

Condonation of Delay:
The assessee sought condonation of a 110-day delay in filing the appeal before the Tribunal, attributing it to pursuing an alternate remedy by filing a petition u/s. 154 of the Income Tax Act. The Tribunal found a good and reasonable cause for the delay and admitted the appeal for adjudication.

Disallowance under Section 14A r.w. Rule 8D:
The Assessing Officer disallowed ?26,17,670 under Section 14A r.w. Rule 8D, citing that dividend income received was from investments made out of borrowed funds. The CIT (Appeals) upheld the disallowance, noting the onus on the assessee to prove investments were made from interest-free funds. The Tribunal observed disallowances under Rule 8D(2)(iii) and Rule 8D(2)(ii) totaling ?5,88,840 and ?20,28,830, respectively. The disallowance under Rule 8D(2)(iii) for administrative expenses was deemed justified, but the Tribunal remanded the issue of disallowance under Rule 8D(2)(ii) for fresh consideration. The Tribunal emphasized the need for the assessee to demonstrate the availability of interest-free funds for investments made, directing a reassessment by the Assessing Officer based on proper evidence.

In conclusion, the appeal was partly allowed for statistical purposes, with the Tribunal confirming one disallowance and remanding another issue for further assessment.