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2022 (2) TMI 776 - HC - Income TaxAddition u/s 14A r.w.r. 8D - disallowance of proportionate expenses and disallowance of depreciation on tax free securities applying section 14A - Whether no expenditure was incurred or claimed towards earning of those exempt incomes? - HELD THAT - the issues involved herein deserve to be answered in favour of the assessee, as per the decision of the Supreme Court in South Indian Bank Ltd. v. Commissioner of Income-tax 2021 (9) TMI 566 - SUPREME COURT as held that in a situation where the assessee has mixed fund (made up partly of interest free funds and partly of interest- bearing funds) and payment is made out of that mixed fund, the investment must be considered to have been made out of the interest free fund. Disallowance would be legally impermissible for the investment made by the assessees in bonds/shares using interest free funds, under Section 14A - if investments in securities is made out of common funds and the assessee has available, non-interest-bearing funds larger than the investments made in tax-free securities then in such cases, disallowance under Section 14A cannot be made. Also the proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds/ securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessee. Thus we remand the matter to the Assessing Officer to decide the issues raised herein afresh, taking note of the observations made in the Supreme Court decision as referred to above and pass appropriate orders, within a period of three months from the date of receipt of a copy of this judgment
Issues Involved
1. Validity of Tribunal's direction to apply Section 14A read with Rule 8D. 2. Justification of applying Section 14A and Rule 8D for proportionate disallowance when accounts are maintained as per the Banking Regulation Act. Detailed Analysis 1. Validity of Tribunal's Direction to Apply Section 14A Read with Rule 8D The Tribunal had directed the Assessing Officer to apply Section 14A read with Rule 8D for disallowing proportionate expenses related to exempt income. This direction was based on the Special Bench decision in the case of Income Tax Officer v. Daga Capital Management Pvt Ltd, which held that Rule 8D is retrospective. The Tribunal remanded the matter to the Assessing Officer to follow this decision and decide the issue afresh after giving the assessee an opportunity to be heard. 2. Justification of Applying Section 14A and Rule 8D for Proportionate Disallowance The Tribunal's decision to apply Section 14A and Rule 8D was challenged on the grounds that the accounts were maintained in accordance with the Banking Regulation Act, and their correctness was not disputed. The Tribunal, however, found merit in the Revenue's contention that Section 14A is applicable. The Tribunal directed the Assessing Officer to consider the decisions of the Madras High Court and the Special Bench, and then decide the issue according to law, after giving the assessee an opportunity to provide necessary details. Supreme Court's Decision The Supreme Court's decision in South Indian Bank Ltd. v. Commissioner of Income-tax was pivotal. The Court held that if an assessee has mixed funds (interest-free and interest-bearing) and the interest-free funds are sufficient to cover the investments in tax-free securities, then it should be presumed that the investments were made from the interest-free funds. This principle was supported by several High Court decisions, including Pr. CIT v. Bombay Dyeing and Mfg. Co. Ltd and CIT v. Reliance Industries Ltd. The Supreme Court concluded that disallowance under Section 14A is not warranted if the assessee has sufficient interest-free funds to cover the investments. High Court's Conclusion In light of the Supreme Court's decision, the High Court remanded the matter to the Assessing Officer to reconsider the issues afresh. The Assessing Officer was directed to take note of the Supreme Court's observations and pass appropriate orders within three months, after providing the appellant a reasonable opportunity to present their evidence. Final Judgment All tax case appeals were disposed of in the above terms, with no costs awarded.
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