2023 (9) TMI 430 - AT - Income Tax

Disallowance u/s. 14A r.w. Rule 8D - DR submitted that the disallowance made by the AO is correct and he has recorded satisfaction that the assessee has incurred interest/indirect expenditure, therefore it cannot be said that the loan funds have not been utilized by the assessee - scope of amendment made to section 14A - HELD THAT - The assessee has incurred interest expenditure and made investments towards earning exempt income. The assessee itself disallowed a sum suomoto as expenses attributable to investments which has yielded exempt income during the year. The investments were made long back to the firm, M/s. Laxmi Estate and investment were made in other companies. We note from the submissions made before the CIT(Appeals) as well as AO that the assessee has not utilized borrowed funds during the impugned assessment year. Assessee has not incurred any expenditure in order to earn exempt income. Admittedly, there is no nexus between the investment in the firm of M/s Lakshmi Estates and the borrowed funds. The AO in the order of the earlier years has also given a categorical finding that the investment in M/s Lakshmi Estates has been made out of assessee's own interest free funds. Therefore, the interest paid on borrowed funds is not attributable to the investment the firm. We do not find any infirmity in the order of the CIT(Appeals), he has passed a good and reasoned order. Also in assessee s own case for AY 2013-14 2020 (2) TMI 1703 - ITAT BENGALURU similar issue has been decided in favour of the assessee - We note that the amendment made to section 14A by Finance Act, 2022 has prospective effect which is settled in the case of PCIT v. Era Infrastructure (India) Ltd. 2022 (7) TMI 1093 - DELHI HIGH COURT Therefore we dismiss the appeal of the revenue.

Summary

Issues Involved:
The judgment involves the following Issues:
1. Whether the CIT(A) correctly held that the AO did not record satisfaction for disallowance u/s 14A r w Rule 8D?
2. Whether the CIT(A) was correct in directing the Assessing Officer to restrict the disallowance to the amount of income claimed as exempt contrary to the provisions of Law?
3. Whether the CIT(A) was right in not appreciating the contents of the CBDT Circular No 5/2014 dated 11.02.2014?

Issue 1:
The ITAT Bangalore considered an appeal challenging the order of the CIT(Appeals) regarding the disallowance under section 14A r.w. Rule 8D. The assessee had tax-exempt investments and indirect interest expenditure. The AO calculated a total disallowance of Rs. 4,30,82,139 under Rule 8D(2), which the CIT(A) restricted to the extent of exempt income received by the assessee, amounting to Rs. 31,231 as dividend income. The revenue contended that the disallowance made by the AO was correct and challenged the CIT(A)'s decision to restrict the disallowance.

Issue 2:
The CIT(A) restricted the disallowance to the amount of exempt income received by the assessee, contrary to the AO's calculation under Rule 8D(2). The AO had disallowed a significant amount under Rule 8D(2)(ii) and (iii), but the CIT(A) limited the disallowance to Rs. 31,231, which was the dividend income earned by the assessee. The Tribunal found that the CIT(A) had considered the relevant judicial authorities and the assessee's own case history to justify the restriction of disallowance to the extent of income earned.

Issue 3:
The CIT(A) did not appreciate the contents of the CBDT Circular No 5/2014 dated 11.02.2014, as raised in the appeal. However, the Tribunal upheld the CIT(A)'s decision to restrict the disallowance based on the income earned by the assessee, in line with judicial precedents and the assessee's case history. The Tribunal also noted that the amendment to section 14A by the Finance Act, 2022 had prospective effect, as settled by the Hon'ble Delhi High Court in a relevant case. Consequently, the Tribunal dismissed the revenue's appeal and upheld the order of the CIT(A).