2022 (5) TMI 172 - AT - Income Tax

Disallowance u/s. 14A read with Rule 8D(2)(ii) (ii) - submission of the Ld. AR that no disallowance of interest expenditure could have been made u/s. 14A of the Act read with Rule 8D(2)(ii) of the Rules as the investments were made out of the own funds of the assessee - HELD THAT - As relying on case of CIT Vs. Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT we hold that no disallowance of interest expenditure is warranted under Rule 8D(2)(ii) of the Rule r.w.s. 14A of the Act. Accordingly, the disallowance of Rs.2,84,43,090/- computed by the AO under Rule 8D(2)(ii) is deleted. Dividend income was earned from only one investment i.e. Metro Diary Limited - When there is a common pool of funds, presumption would arise that investments which yield tax free returns were made by the assessee out of its own funds. We also find that no new investment during the year has been made in the shares of Metro Dairy Ltd. as the opening value as on 01.04.2012 was Rs.9,60,50,074/- and closing value of investment as on 31.03.2013 was Rs.9,60,50,074/-. Accordingly, by taking the investments which yielded the exempt income for computing disallowance under Rule 8D(2)(iii) of the Rules @ 0.50% of the dividend earning investment of Rs.9,60,50,074/- comes to Rs.4,80,250/-. The assessee has already made a suo moto disallowance of Rs.2,04,697/- in its return, thus, balance amount of Rs.2,75,553/- (Rs.4,80,250-Rs.2,04,697) is sustained as disallowance u/s. 14A r.w.r. 8D(2)(iii) of the Act. The appeal of the assessee is, therefore, partly allowed.

Summary

Issues:
- Disallowance u/s. 14A read with Rule 8D(2)(ii) & (iii) of the Income Tax Rules.

Analysis:
1. The appeal was against the direction of the Ld. CIT(A) to recompute the disallowance u/s. 14A read with Rule 8D(2)(ii) & (iii) of the Income Tax Rules concerning the exemption claimed on dividend income.

2. The AO initially disallowed an expense of Rs. 2,04,697/-, but upon further examination, calculated the disallowance at Rs. 3,12,81,060/-, leading to a total disallowance of Rs. 3,10,76,363/-, which was added back to the assessee's income for taxation.

3. The Ld. CIT(A) directed the AO to recompute the disallowance based on the investments yielding dividend income, following the decision of the Hon'ble Calcutta High Court in a specific case, emphasizing that only investments generating dividend income should be considered for disallowance.

4. The assessee argued that no disallowance should be made as investments were from own funds, citing relevant legal precedents. The Ld. AR highlighted the adequacy of own funds for investments and the direct attribution of interest expenses to business income.

5. The Tribunal agreed with the assessee, deleting the disallowance of Rs. 2,84,43,090/- under Rule 8D(2)(ii) as investments were made from own funds. It also acknowledged that disallowance under Rule 8D(2)(iii) should only consider investments yielding dividend income, sustaining a disallowance of Rs. 2,75,553/-.

6. The Tribunal's decision was based on the principle that when own funds are sufficient to cover investments, a presumption arises that such investments were made from own funds, as supported by legal precedents and the specific circumstances of the case.

7. The appeal was partly allowed, with the Tribunal emphasizing the importance of considering only investments generating dividend income for disallowance calculations under Rule 8D(2)(iii) and recognizing the significance of utilizing own funds for investments to determine the applicability of disallowances under section 14A of the Income Tax Act.