2021 (11) TMI 1005 - AT - Income Tax

Disallowance u/s 14A under rule 8D2(ii) in respect of interest expenditure - case of the assessee has been selected for scrutiny under CASS and statutory notices were duly issued and served upon the assessee - HELD THAT - Three investments in growth funds, in foreign companies and in properties have to be excluded while calculating the average investments. Similar adjustment are required to be made in the figures of investments in the corresponding previous year ended on 31.03.02013 as stated hereinabove. We note that the average investments come to ₹ 135,63,19,992.50. Similarly, the average own funds the calculation whereof is extracted above are ₹ 136,10,03,859/-. It is apparent from the above calculation that assessee s average own funds are more than the average value of investments and in our considered opinion , no disallowance is called for under rule 8D2(ii). The case of the assessee is squarely covered by the decisions as referred to above by the Ld. A.R. in support of his arguments. In the case of CIT vs. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT and it has been held that where the interest free funds as well as own funds employed in the business are more than the investments in the shares and securities yielding exempt income, in that case no disallowance is to be made. Similar ratio has been laid in another decision in the subsequent decision in the case of HDFC Bank 2016 (3) TMI 755 - BOMBAY HIGH COURT that where assessee s own funds are more than the investments made in shares and securities no disallowance is to be made under section 14A. In view of the facts of the instant case and the ratio laid down by the Jurisdictional High Court we are inclined to set aside the order of Ld. CIT(A) and direct the AO to delete the disallowance as made under rule 8D2(ii). - Decided in favour of assessee.

Summary

Issues Involved:
1. Methodology or basis of apportionment for investments yielding both taxable and exempt income under Rule 8D.
2. Consideration of investments in subsidiary and associated companies while calculating average investments under Rule 8D(2)(ii) and Rule 8D(2)(iii).
3. Confirmation of disallowance of ?1,24,67,062/- under Rule 8D(2)(ii) for interest expenditure.
4. Deletion of disallowance of ?3,89,99,890/- under Rule 8D(2)(iii) by CIT(A).

Issue-wise Detailed Analysis:

1. Methodology or Basis of Apportionment for Investments Yielding Both Taxable and Exempt Income under Rule 8D:
The assessee argued that the CIT(A) failed to provide a methodology for apportioning investments yielding both taxable and exempt income for the purpose of disallowance under Rule 8D. The CIT(A) directed the AO to re-work the disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii) by considering only those investments which yield exempt income, following the decision of the Hon'ble Supreme Court in Maxopp Investment Ltd. vs. CIT, New Delhi. The Supreme Court held that "expenditure attributable to exempt income has to be apportioned to be disallowed under section 14A."

2. Consideration of Investments in Subsidiary and Associated Companies:
The CIT(A) rejected the assessee's contention that investments in subsidiary and associated companies should be excluded while calculating average investments under Rule 8D(2)(ii) and Rule 8D(2)(iii). The CIT(A) relied on the Supreme Court's decision in Maxopp Investment Ltd. vs. CIT, which stated that the dominant purpose of the investment is not relevant and that any expenditure incurred on earning dividend income must be disallowed.

3. Confirmation of Disallowance of ?1,24,67,062/- under Rule 8D(2)(ii) for Interest Expenditure:
The AO disallowed ?1,24,67,062/- under Rule 8D(2)(ii) for interest expenditure, which was confirmed by the CIT(A). The assessee argued that its own funds were sufficient to cover the investments yielding exempt income, citing decisions from the Jurisdictional High Court in cases like CIT vs. HDFC Bank and HDFC Bank vs. CIT. The Tribunal found merit in the assessee's contention, noting that the average own funds were more than the average value of investments. Consequently, the Tribunal directed the AO to delete the disallowance of ?1,24,67,062/- under Rule 8D(2)(ii).

4. Deletion of Disallowance of ?3,89,99,890/- under Rule 8D(2)(iii) by CIT(A):
The Revenue appealed against the deletion of ?3,89,99,890/- under Rule 8D(2)(iii) by CIT(A). The CIT(A) had directed the AO to exclude investments yielding taxable income while calculating the disallowance under section 14A. The Tribunal noted that the CIT(A) had allowed the appeal in the previous year, as the Supreme Court's decision in Maxopp Investments Ltd. vs. CIT was not available at that time. However, the Tribunal applied its decision from ITA No.5682/M/2018 A.Y. 2014-15 to dismiss the Revenue's appeal, thereby upholding the deletion of the disallowance.

Conclusion:
The Tribunal allowed the assessee's appeal, directing the AO to delete the disallowance of ?1,24,67,062/- under Rule 8D(2)(ii). It also dismissed the Revenue's appeal, upholding the deletion of ?3,89,99,890/- under Rule 8D(2)(iii). The Tribunal's decisions were based on the sufficiency of the assessee's own funds to cover investments yielding exempt income and the application of the Supreme Court's ruling in Maxopp Investments Ltd. vs. CIT.