2022 (12) TMI 293 - AT - Income Tax

Disallowance u/s 14A r.w. rule 8D - interest allocated on surmises and conjectures by treating even Public provident fund deposits as investments for earning tax exempt income - HELD THAT - AO recorded the finding that the assessee cannot earn dividend without management of the investment. There are numerous precedents which support the view that even if the assessee claims that he has not incurred any expenditure in earning dividend income, the provisions of section 14A of the Act r.w. Rule 8D of the Rules would still apply, if the AO having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee. Both the Ld. AO as also the Ld. CIT(A), having regard to the accounts of the assessee reached the conclusion that the claim of the assessee that he did not incur any expenditure in relation to income which does not form part of the total income is not sustainable in the eye of law. If that be so, in our opinion, the Ld. CIT(A) was perfectly justified in holding that the provisions of section 14A r.w. Rule 8D of the Rules are attracted to the case of the assessee. We, therefore reject the ground No. 1 of the assessee. Disallowance of interest under rule 8D(iii) r.w.s. 14A ignoring that the assessee has capital and interest free fund far in excess of investments - As regards the alternate ground No. 2, it does not survive as the Ld. CIT(A) has already set aside the matter and restored it to the file of the Ld. AO with direction to him to decide afresh the quantum of disallowance in Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT . We, however observe that the assessee has not made any suo-moto disallowance, therefore there will not be any occasion to limit the disallowance at a minimum as stated by the Ld. CIT(A) in the last sentence of his direction extracted above. In this view of the matter, the alternate ground No. 2 is also rejected.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act.
2. Application of Rule 8D(iii) r.w.s. 14A regarding interest disallowance.
3. Consideration of capital and interest-free funds in excess of investments.

Issue 1: Disallowance under Section 14A of the Income Tax Act:
The appeal concerned the disallowance of Rs. 2,68,168/- under section 14A of the Income Tax Act, 1961. The Assessing Officer found that the assessee had assets in the form of shares and a balance in PPF, along with claimed interest payment on borrowed capital. The AO required a detailed working of disallowance under section 14A, which the assessee contested. The AO applied Rule 8D, resulting in a disallowance of Rs. 3,27,821/-, which was reduced to Rs. 2,68,168/- due to a separate disallowance of interest expenditure. The CIT(A) directed the AO to consider only investments yielding non-taxable income for the disallowance under section 14A, following judicial precedents. The Tribunal upheld the CIT(A)'s decision, rejecting the assessee's appeal on this ground.

Issue 2: Application of Rule 8D(iii) r.w.s. 14A regarding interest disallowance:
The alternate ground raised by the assessee related to the application of Rule 8D(iii) r.w.s. 14A, arguing that the capital and interest-free funds exceeding investments were not considered. However, the CIT(A) had already set aside the matter and remanded it to the AO for fresh consideration in light of relevant judicial decisions. The Tribunal noted that since the assessee did not make any suo-moto disallowance, there was no need to limit the disallowance as directed by the CIT(A). Consequently, the Tribunal rejected this alternate ground as well.

Issue 3: Consideration of capital and interest-free funds in excess of investments:
The Tribunal deliberated on the argument regarding the consideration of capital and interest-free funds exceeding investments. The CIT(A) had already directed a fresh assessment on this matter, taking into account the Supreme Court's judgment in Maxopp Investment Ltd. vs. CIT. The Tribunal highlighted that as there was no voluntary disallowance by the assessee, the question of limiting the disallowance did not arise. Therefore, the Tribunal dismissed this ground of appeal.

In conclusion, the Tribunal upheld the CIT(A)'s decision regarding the disallowance under section 14A of the Income Tax Act and rejected the appeal of the assessee. The matter related to the application of Rule 8D(iii) r.w.s. 14A and the consideration of capital and interest-free funds in excess of investments were remanded back to the AO for fresh assessment in accordance with relevant legal principles.