2021 (4) TMI 787 - HC - Income Tax

Disallowance u/s 14A r.w.r 8D(2)(ii) and 8D(2)(iii) -Tribunal deleted the addition - as per revenue Board's Circular No.5/2014 dated 11.02.2014 , which emphasizes that the only expenditure allowable is which is relatable to earning of income and therefore, the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not? - HELD THAT - It is evident that the capital and reserves of the company are far in excess of the investment made. Therefore, the presumption arises that such investments have been made from capital and reserves of the company and from non interest bearing funds and not out of borrowed funds to warrant any disallowance while computing the income. See Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT and Lalsons enterprises 2010 (4) TMI 98 - DELHI HIGH COURT . It is also pertinent to mention here that the Assessing Officer has not recorded the satisfaction that assessee had incurred expenditure to earn exempt income as envisaged under Rule 8D(1) of the Rules. There is no positive material to show that the assessee had incurred such expenditure to earn exempt income. Commissioner of Income Tax (Appeals) and the tribunal therefore, have rightly deleted the disallowance under Section 14A read with Rule 8D of the Rules. The Circular No.5/2014 dated 11.02.2014 has no application to the facts of the case as the Assessment Year in question is 2009-10. In view of preceding analysis, the substantial question of law framed by a bench of this court is answered against the revenue.

Summary

Issues:
Whether the tribunal was justified in law in deleting the disallowances made under Section 14A r.w.r 8D(2)(ii) and 8D(2)(iii) of the Income Tax Act, 1961 without appreciating the Board's Circular No.5/2014 dated 11.02.2014?

Analysis:

Issue 1: Disallowances under Section 14A r.w.r 8D(2)(ii) and 8D(2)(iii)

The appeals were filed by the revenue against the common order passed by the Income Tax Appellate Tribunal. The Assessing Officer had made disallowances under Section 14A read with Rule 8D of the Rules. The Commissioner of Income Tax (Appeals) deleted the disallowance under Rule 8D(2)(ii) but sustained the disallowance under Rule 8D(2)(iii). The tribunal dismissed the appeal by the revenue and allowed the cross objection by the assessee. The main contention of the revenue was that the disallowances were justified as per Rule 8D(2)(ii) and (iii) and the CBDT Circular No.5/2014 emphasized that only expenses related to earning exempt income should be considered for disallowance.

Issue 2: Justification for Disallowances

The revenue argued that the Assessing Officer correctly added the exempted dividend income under Rule 8D(2)(ii) and that the disallowance under Rule 8D(2)(iii) was wrongly deleted by the tribunal. They contended that interest-free deposits should not be considered non-performing assets and that the Circular No.5/2014 dated 11.02.2014 clarified the treatment of expenses related to earning exempt income. On the other hand, the assessee argued that the Assessing Officer mechanically applied the formula without recording satisfaction regarding expenditure for earning exempt income. They relied on previous judgments to support their position.

Issue 3: Capital and Reserves Analysis

The tribunal analyzed the balance sheet of the assessee, showing the share capital and reserves, to determine that the capital and reserves of the company exceeded the investments made. Therefore, it was presumed that the investments were made from capital, reserves, and non-interest bearing funds rather than borrowed funds. The absence of recorded satisfaction by the Assessing Officer regarding expenditure for earning exempt income led the Commissioner of Income Tax (Appeals) and the tribunal to delete the disallowance under Section 14A read with Rule 8D of the Rules.

In conclusion, the High Court held that the tribunal was justified in law in deleting the disallowances made under Section 14A r.w.r 8D(2)(ii) and 8D(2)(iii). The court found that the capital and reserves of the company were sufficient to cover the investments, and there was no positive material to show that the assessee had incurred expenditure to earn exempt income. The Circular No.5/2014 dated 11.02.2014 was deemed inapplicable to the case due to the relevant Assessment Year being 2009-10. Consequently, the substantial question of law was answered against the revenue and in favor of the assessee, leading to the dismissal of the appeals.