2023 (2) TMI 868 - HC - Income Tax

Addition u/s 14A r.w.r. 8D - Disallowance attributable to earning of exempt income - HELD THAT - There is no discussion by the AO with regard to the computation of inadmissible expenditure made by the assessee forming part of the return of income. AO has not recorded any satisfaction that the working of inadmissible expenditure u/s 14A is incorrect with regard to the books of account of the assessee. The provision u/s 14(2) does not empower the AO to apply Rule 8D straightaway without considering the correctness of the assessee s claim in respect of expenditure incurred in relation to the exempt income. We agree with the view of the ITAT that in the present case the AO has neither examined the claim in respect of expenditure incurred in relation to exempt income of the assessee nor has recorded any satisfaction with regard to the correctness of assessee s claim with reference to the books of account. Consequently, the disallowance made by applying the Rule 8D is not only against the statutory mandate but contrary to the legal principles laid down. In our view too, the CIT (A) has rightly deleted the addition made on account of interest expenditure as the assessee had sufficient interest free surplus fund to make the investment and the ITAT has rightly deleted the disallowance made by the AO u/s 14A r.w Rule 8D. Consequently we hold that, the interest expenditure cannot be disallowed u/s14A r.w. Rule 8D(2)(ii) under any circumstances. Decided in favour of assessee.

Summary

Issues Involved:
1. Appeal against ITAT order partially allowing respondent's appeal and dismissing revenue's appeal.
2. Disallowances made by AO under section 14A r.w. Rule 8D.
3. CIT(A) partially allowing assessee company's appeal.
4. Tribunal's decision on appeals filed by Assessee company and Revenue.
5. Questions of law raised for consideration by the High Court.

Analysis:

1. The appeal before the High Court was against the ITAT order dated 5th April 2017. The respondent's appeal was partly allowed, and the revenue's appeal was dismissed. The case involved the assessment year 2011-12, where the AO made various additions and disallowances, including disallowances under section 14A r.w. Rule 8D amounting to Rs. 5,11,85,000. The CIT(A) partly allowed the assessee company's appeal, leading to appeals before the ITAT by both the Assessee company and the Revenue.

2. The key issues raised in the appeal for the High Court's consideration included whether the AO correctly disallowed interest costs against dividend income, the relevance of presumption of own interest-free funds, and the deletion of interest disallowed by the AO. The appellant argued that the ITAT erred in endorsing the CIT(A)'s order and not considering interest expenses while calculating disallowance under section 14A r.w. Rule 8D due to the absence of a separate account for investment related to exempt income.

3. The respondent, through senior counsel, relied on legal precedents, including the judgment of the Apex Court in Godrej & Boyce Manufacturing Co. Ltd. vs. Deputy Commissioner of Income-Tax, emphasizing the requirement for proof of actual expenditure incurred in earning dividend income. The respondent also cited the South Indian Bank Ltd. case to support the contention that investments from mixed funds should be considered as made from interest-free funds, as per the assessee's right of appropriation.

4. The High Court, after considering the arguments and precedents, found that the AO did not examine the claim of expenditure incurred in relation to exempt income nor record satisfaction with the correctness of the claim. Consequently, the disallowance made under Rule 8D was deemed against statutory mandate and legal principles. The CIT(A)'s deletion of the interest expenditure addition was upheld, and the disallowance made by the AO under section 14A r.w. Rule 8D was rightly deleted by the ITAT. Therefore, the High Court dismissed the appeal, concluding that interest expenditure cannot be disallowed under section 14A r.w. Rule 8D(2)(ii) in the given circumstances.

5. In the final judgment, the High Court held that no substantial question of law arose, leading to the dismissal of the appeal with no order as to costs in favor of the assessee. The judgment provided a detailed analysis of the issues raised, legal principles applied, and the rationale behind the decision, ensuring a comprehensive review of the case.