2021 (6) TMI 286 - AT - Income Tax

Addition u/s 14A r.w.r 8D(2)(ii) - sufficiency of own funds - CIT-A deleted the addition - HELD THAT - We find that the CIT(A) has relied on the facts and the financial statements and the submissions of the assessee, Whereas the assessee has made investments out of the surplus funds and no borrowed funds are utilized for investments and such investments have been made in subsidiaries to have control on the management of the subsidiaries and not to earn any income. Further, the borrowed funds were utilized only for the purpose of normal course of business. We find that the CIT(A) considered the facts, provisions of law, judicial decisions and financial statements and also the investments are made out of the interest free funds On perusal of the CIT(A)order, we find that the assessee could able to substantiate before the lower authorities on the surplus funds including reserves and surplus and in this assessment year, the assessee has reserves share capital to the extent of ₹ 1,231.5 crores, whereas the investments are much less than the available surplus balances - See HDFC BANK LTD. VERSUS THE DEPUTY COMMISSIONER OF INCOME TAX-2 (3) , MUMBAI OTHERS 2016 (3) TMI 755 - BOMBAY HIGH COURT THE COMMISSIONER OF INCOME TAX VERSUS RELIANCE UTILITIES POWER LTD. 2009 (1) TMI 4 - BOMBAY HIGH COURT We find that the assessee has sufficient funds for making investments and the A.O has not doubted the availability of the funds but made disallowance invoking the provisions of Sec.14A r.w.r 8D(2)(ii).The Ld. DR could not substantiate or controvert the findings of the CIT(A) with any new cogent material or information but relied only on the order of the A.O. Accordingly, we do not find any merits in the submissions of the revenue and the CIT(A) considered the facts and relied on the judicial decisions and has passed a reasoned order - Appeals filed by the revenue are dismissed.

Summary

Issues involved:
- Appeal against orders of Commissioner of Income Tax (Appeals) for A.Y. 2010-11 & 2011-12 and A.Y. 2013-14 & 2014-15.
- Disallowance under Sec. 14A r.w.r 8D(2)(ii) and 8D(2)(iii) of the Income Tax Act, 1961.
- Whether investments made out of surplus funds warrant disallowance under Sec. 14A.
- Consideration of interest-free funds for investments and disallowance calculation.
- Judicial interpretation and application of relevant legal provisions.

Detailed Analysis:

1. Disallowance under Sec. 14A r.w.r 8D(2)(ii) and 8D(2)(iii):
The appeals were filed against orders of the Commissioner of Income Tax (Appeals) for different assessment years, challenging disallowances made under Sec. 14A r.w.r 8D(2)(ii) and 8D(2)(iii) of the Income Tax Act, 1961. The primary issue was whether the disallowances were justified, considering the facts and circumstances of the case.

2. Investments made out of surplus funds:
The core argument revolved around whether investments made out of surplus funds, without utilizing borrowed funds, should warrant disallowance under Sec. 14A. The appellant contended that investments were made out of proprietary funds to retain control over subsidiaries, not for earning income. This raised the question of the applicability of disallowance provisions when investments are made from interest-free funds.

3. Consideration of interest-free funds and disallowance calculation:
The Tribunal considered the contention that investments were made from interest-free funds, and the borrowed funds were used solely for business purposes. The appellant's claim of having sufficient interest-free funds to cover investments was crucial in determining the sustainability of disallowances under Sec. 14A. The Tribunal analyzed the breakdown of investments to ascertain the proportion financed by short-term borrowings.

4. Judicial interpretation and application of legal provisions:
The Tribunal extensively reviewed judicial decisions, including the Hon'ble ITAT Mumbai's directions and relevant case laws cited by the parties. The CIT(A) relied on precedents and financial statements to conclude that disallowance under Sec. 14A r.w.r 8D(2)(ii) was not warranted due to investments being made out of interest-free funds. The Tribunal upheld the CIT(A)'s order, emphasizing the adequacy of funds for investments and dismissing the revenue's appeal.

In conclusion, the Tribunal dismissed all four appeals filed by the revenue, emphasizing the importance of considering the source of funds for investments and the application of Sec. 14A provisions in light of interest-free funds. The decision highlighted the significance of judicial precedents and financial evidence in determining the legitimacy of disallowances under the Income Tax Act.