2023 (2) TMI 574 - AT - Income Tax

Disallowance of interest expenditure u/s 14A r.w. Rule 8D - disallowance under Rule 8D(2)(ii) of the Income-tax Rules with respect to interest - HELD THAT - CIT(A) while deciding the issue in favour of the assessee has given a finding that on the loan that have been borrowed by the assessee for working capital purpose, Banks had imposed stringent End- Use conditions which prohibited the use of funds for investments in shares or other companies or capital market. The End-Use of the funds were monitored by considering the auditors certificate for End-Use compliance that were filed by the assessee. He has given a finding that no penal interest has been charged by the bank to the assessee or the loans have been recalled for violating the conditions of diverting the funds for making investments in shares or capital markets. He has thereafter given a finding that the interest bearing funds borrowed by the assessee have not been utilized for making the investments. Hon ble Delhi High Court 2022 (8) TMI 1344 - DELHI HIGH COURT had upheld the order of Tribunal and had held that no substantial question of law arise for consideration. - Decided against revenue. Disallowance under Rule 8D(2)(iii) - AO has considered the average value of the entire investments for working out the disallowance @ 0.5% of the average investments - HELD THAT - We find that Hon ble Delhi High Court in the case of Delhi International Airport (P.) Ltd. 2022 (10) TMI 300 - DELHI HIGH COURT has held that Section 14A of the Act envisages that there should be actual receipt of income and hence Section 14A of the Act will not apply where no exempt income is received or receivable during the relevant previous year. Before us, it is assessee s contention that the AO has considered the average value of the entire investments (which included investments from which no dividend has been received by the assessee) for working out of the disallowance under Rule 8D(2)(iii) of the Income-tax Rules - we find force in the arguments of Learned AR. We, therefore, restore the issue back to the file of AO and direct him to work out the disallowance under Rule 8D(2)(iii) of the Income-tax Rules on the basis of investments, which have yielded exempt income and in accordance with law. Needless to state that AO shall grant adequate opportunity of hearing to the assessee and assessee is also directed to promptly produce relevant document as called for by authorities. Thus the ground of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of interest expenditure under Rule 8D(2)(ii) of the Income Tax Rules.
2. Disallowance under Rule 8D(2)(iii) of the Income Tax Rules.

Issue-Wise Detailed Analysis:

1. Disallowance of Interest Expenditure under Rule 8D(2)(ii):

The Revenue's appeal challenged the CIT(A)'s decision to delete the disallowance of interest expenditure made by the AO under Rule 8D(2)(ii). The AO had disallowed Rs. 49.71 crores, concluding that the assessee's interest-bearing funds were used for making investments yielding exempt income. The CIT(A) deleted this disallowance, noting that the funds borrowed by the assessee were specifically for working capital and fixed assets, as evidenced by bank sanction letters and auditor certificates confirming compliance with RBI guidelines. The CIT(A) observed that the funds were not used for investments in shares or capital markets, and no penal interest was levied by banks for any violations.

The Tribunal upheld the CIT(A)'s decision, noting that the Revenue failed to provide any distinguishing facts from earlier years where similar disallowances were deleted and upheld by higher judicial forums, including the Delhi High Court. The Tribunal found no reason to interfere with the CIT(A)'s order, dismissing the Revenue's appeal.

2. Disallowance under Rule 8D(2)(iii):

The assessee's appeal contested the CIT(A)'s decision to uphold the AO's disallowance of Rs. 6.25 crores under Rule 8D(2)(iii). The AO had computed this disallowance based on the average value of the entire investments, which the assessee argued was incorrect as not all investments yielded exempt income. The assessee contended that the disallowance should be restricted to investments that actually yielded exempt income, citing various judicial pronouncements.

The Tribunal agreed with the assessee's contention, referencing the Delhi High Court's ruling in the case of Delhi International Airport (P.) Ltd., which held that Section 14A applies only where there is actual receipt of exempt income. The Tribunal restored the issue to the AO to recompute the disallowance under Rule 8D(2)(iii) based on investments that yielded exempt income, directing the AO to provide the assessee with an adequate opportunity to present relevant documents.

Conclusion:

The Tribunal dismissed the Revenue's appeal concerning the disallowance under Rule 8D(2)(ii) and allowed the assessee's appeal regarding the disallowance under Rule 8D(2)(iii), directing the AO to reassess the disallowance based on investments that yielded exempt income. The decision emphasized adherence to judicial precedents and proper application of the Income Tax Rules.