2022 (7) TMI 811 - AT - Income Tax

Disallowance u/s 14A r.w.r 8D - Whether interest bearing funds was not invested by assessee ? - HELD THAT - In case of Gujarat Fluoro chemicals Ltd. 2020 (10) TMI 252 - GUJARAT HIGH COURT reiterated that where interest free funds available with assessee were far more than gross investment, it could safely be harboured that interest bearing funds was not invested by assessee and, thus, no disallowance under section 14A to be made. In view of the consistent position taken by the Gujarat High Court, as applied to the facts instant case, in our considered view, no disallowance is called for in respect of interest expenses under section 14A of the Act, when the assessee is having sufficient interest-free funds at its disposal in excess of investment made in instruments yielding exempt income. So far as administrative expenses it is not acceptable to simply state that no administrative expenditure was incurred to earn the above exempt income. The disallowance of administrative expenditure under section 14A of the Act was again affirmed by the Mumbai ITAT in the case of Zee Entertainment Enterprises Ltd. 2017 (5) TMI 719 - ITAT MUMBAI . The Ahmedabad in the case of Sun Pharmaceutical Industries Ltd. 2017 (6) TMI 1323 - ITAT AHMEDABAD directed the A.O. to compute the disallowance for administrative expenditure as per the formula given under Rule 8D. Thus we are of the considered view that Ld. CIT(Appeals) has not erred in facts and in law in confirming disallowance in respect of administrative expenses as per the formula given under Rule 8D. - Assessee appeal is partly allowed.

Summary

Issues:
- Disallowance under section 14A r.w. rule 8D of I.T. Rules
- Interpretation of directions by the Hon'ble Tribunal
- Exclusion of taxable investment from disallowance
- Consideration of net interest expense for disallowance
- Administrative expenses for earning exempt income

Analysis:
1. The appeal was against the order of the ld. Commissioner of Income Tax (Appeals) regarding disallowance under section 14A of the Act for the assessment year 2009-10.
2. The ITAT had previously remanded the issue back to the assessing officer to examine the relevant facts regarding the disallowance under section 14A. The assessing officer excluded a taxable investment from the disallowance and calculated the net interest expense for disallowance under section 14A.
3. The Ld. CIT(A) confirmed the disallowance made by the assessing officer after considering the directions given by the Hon'ble Tribunal and the substantial reduction in disallowance.
4. The primary contention before the ITAT was twofold. Firstly, the assessee argued that since it had substantial interest-free funds, no disallowance should be made for net interest expense. Secondly, the assessee contended that no administrative expenses were incurred for earning exempt income.
5. The Gujarat High Court's consistent position was cited, stating that if interest-free funds exceed investments yielding exempt income, no disallowance is warranted under section 14A. However, the ITAT held that administrative expenses need to be disallowed under section 14A as per the formula given under Rule 8D.
6. Various judicial precedents were referred to regarding the necessity of considering administrative expenses related to investments made for earning exempt income. The ITAT upheld the disallowance of administrative expenses as per Rule 8D.
7. Ultimately, the ITAT partly allowed the assessee's appeal, confirming the disallowance in respect of administrative expenses as per Rule 8D.

This detailed analysis covers the issues involved in the legal judgment comprehensively, highlighting the key arguments and decisions made by the authorities involved in the case.