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2022 (11) TMI 132 - AT - Income TaxDisallowance u/s 14A read with Rule 8D - sufficiency of own funds - HELD THAT - Since the assessee company has sufficient own interest free funds and had not borrowed the funds to make investment in shares to earn the dividend income, the provisions of Section 14A is not applicable and consequently, the addition made by the authorities below cannot be sustained in the eye of law. Further, when the A.O. is not accepting the contention of the assessee company that no expenditure is incurred in relation to earning exempt income, then the burden lies on the Revenue to prove that assessee company had incurred the expenditure to earn the dividend income. In the instant case, the A.O. made the impugned addition on conjectures and surmises and applied the provisions of Section 14A read with Rule 8D - We delete the addition made by the A.O. and partly sustained by the CIT(A) on account of disallowance made u/s 14A r.w.r 8D - Accordingly, the grounds of appeal raised by the assessee on this issue are allowed. ALP determined by the A.O.- Arm s Length interest on loan @ 12.83% - HELD THAT - We find that the assessee company had provided equity to AE, whereas, the TPO treated it as loan transaction and recommended the addition on account of the Arm s Length interest on loan @ 12.83%. We find force in the arguments of Assessee that the TPO treated the equity fund to AE as a loan transaction. Respectfully following the decision of Coordinate Bench of the Tribunal in assessee s own case for the preceding A.Y. 2013-14 2020 (1) TMI 858 - ITAT DELHI we delete the addition made by the A.O. on account of Arm s Length interest on loan @ 12.83% and sustained by the CIT(A). Accordingly, the grounds of the assessee company on this issue are allowed.
Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961. 2. Transfer pricing adjustment on account of non-payment of interest on loan to Associated Enterprises (AE). Issue-wise Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D: The assessee company, engaged in trading shares and securities, filed its return for the Assessment Year 2014-15, declaring a loss. The Assessing Officer (A.O.) scrutinized the return and noted that the assessee had substantial investments in shares, earning a tax-free exempt income of Rs.1,70,76,212/-. The A.O. invoked Section 14A read with Rule 8D, disallowing Rs.1,24,00,298/- as expenditure incurred to earn this exempt income. The assessee contended that the investments were made from surplus funds and not borrowed funds, thus Section 14A should not apply. The A.O. disagreed, citing expenses on manpower and office maintenance for managing these investments. The CIT(A) partly allowed the assessee's appeal, directing the A.O. to restrict the disallowance to the amount of dividend earned. The Tribunal, referencing the assessee's substantial net worth (Rs.130.11 crores) compared to its investments (Rs.39.49 crores), ruled that the investments were made from interest-free funds. It noted that the A.O. did not prove that expenses were incurred to earn the exempt income, making the disallowance on conjectures and surmises. The Tribunal followed its earlier decision in the assessee's case for A.Y. 2013-14, where similar disallowance was deleted. Consequently, the Tribunal deleted the disallowance of Rs.1,24,00,298/-. 2. Transfer Pricing Adjustment on Interest on Loan to AE: The A.O. noted that the assessee had invested in equity of its foreign subsidiaries without obtaining an auditor's report in Form No.3CEB. The matter was referred to the Transfer Pricing Officer (TPO), who re-characterized the equity investment as a loan transaction and computed an Arm's Length Price (ALP) interest at 12.83%, resulting in an addition of Rs.1,34,91,351/-. The CIT(A) upheld this addition. The assessee argued that the equity investment should not be treated as a loan and cited a similar issue resolved in its favor for A.Y. 2013-14. The Tribunal agreed with the assessee, noting that the TPO had incorrectly re-characterized the equity investment as a loan. It highlighted that the A.O. did not provide a specific finding that the transaction was a sham or that income had arisen from it. Citing the Tribunal's previous decision for A.Y. 2013-14, the Tribunal ruled that the addition was not sustainable and deleted the Rs.1,34,91,351/- adjustment. Revenue's Appeal: The Revenue's appeal contested the CIT(A)'s decision, focusing on the non-provision of loan details by the assessee. However, the tax effect of the appeal was below Rs.50 lakhs, making it non-maintainable under CBDT Circular 17/2019. Consequently, the Tribunal dismissed the Revenue's appeal. Conclusion: The Tribunal allowed the assessee's appeal, deleting the disallowance under Section 14A and the transfer pricing adjustment on interest. The Revenue's appeal was dismissed due to the low tax effect. The order was pronounced on 31.10.2022.
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