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Income Tax Appellate Tribunal, DELHI BENCH “A” NEW DELHI
Before: SHRI CHALLA NAGENDRA PRASAD & SHRI M BALAGANESH
Assessee by Shri Ved Jain, Adv. & Shri Pawan Garg, CA Revenue by Shri Ajay Kumar Arora, Sr. DR सुनवाईक�तारीख/ Date of hearing: 05.06.2025 30.07.2025 उ�ोषणाक�तारीख/Pronouncement on आदेश /O R D E R PER C.N. PRASAD, J.M.
The appeal and cross objection are filed by the Revenue and Assessee respectively against the order of the Ld. Commissioner of Income Tax (Appeals)-31, New Delhi dated 09.10.2024 for the AY 2015-16. The Revenue challenged the order of the Ld. CIT(Appeals) in restricting the disallowance u/s 14A read with Rule 8D to the exempt income of Rs.2,29,417/- received by the assessee during the year under consideration as against Rs.8,00,07,137/- disallowed by the Assessing Officer. In the cross objection the assessee contended that the disallowance u/s 14A read with Rule 8D cannot be made on the basis of investment that do not yield any exempt income. It was also contended that no disallowance under 14A can be made in the absence of any expenditure incurred for any tax free income. In the cross objection the assessee also contended in ground no.1(iii) that no satisfaction recorded by the AO as to the contention of the assessee that having not incurred any expenditure for earning tax free income and therefore there cannot be any disallowance u/s 14A of the Act.
Ld. Counsel for the assessee submits that the issue in present appeal and cross objection filed by the assessee is squarely covered in favour of the assessee by the coordinate bench in assessee’s own case which is placed at page 74 to 92 of the Paper Book.
Heard rival submissions, perused the orders of the authorities below. The Assessing Officer while completing the assessment 2 computed the disallowance u/s 14A at Rs.8,00,07,137/- which comprising of disallowance under 8D(2)(ii) of the Act in respect of interest at Rs.4,89,96,631/- and disallowance under 8D(2)(iii) being 0.5% of average investments at Rs.3,10,10,507/- observing as under:
“4. Disallowance u/s 14A: The perusal of the audited financial results, it is observed that the assessee has made investment of Rs.696,71,49,829/- in unquoted shares. During the course of assessment proceedings, the assessee has been asked to furnish the details pertaining to claim of large interest expenses relatable to exempt investment u/s 14A. The reply was filed but it was not found satisfactory. It is also observed that the assessee incurred interest expenses amounting to Rs.51,73,812/- which has been claimed in the Profit & Loss Account. The Hon’ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. vs. DCIT Range-10(2) and Anr. and W.P. No.758/10 held that the Assessing Officer is bound to determine the expenditure which has been incurred in relation to income which does not form part of total income under the Income Tax Act, 1961. Therefore, disallowance of expenses in relation to income which don’t form part of total income is computed as per the provisions of sub- section (2) of the section 14 read with Rule 8D of the Income Tax Rules, 1962.”
On appeal the Ld. CIT(A) accepting the alternative contention of the assessee that even if disallowances were to be made it should not exceed exempt income the Ld.CIT(A) restricted the disallowance to the exempt income of Rs.2,29,417/- earned by the assessee.
In the cross objection the primary contention of the assessee is that the disallowance u/s 14A read with Rule 8D cannot be made on the basis of investment that do not yield any exempt income. Ld. Counsel contended that the value of opening investment as on the first day and as on the last day of the FY 2014-15 is nil since the assessee purchased reliance mutual fund for Rs.3 crores on 02.12.2014 and the same was redeemed for Rs.3,02,29,417/- on 04.01.2015. Ld. Counsel stated that this fact was also brought to the notice of the Ld. Assessing Officer as well as Ld. CIT(Appeals). In view of these submissions, we restore this issue to the file of the Assessing Officer who shall examine as to whether the opening balance of investment as on 01.04.2014 and also as on 31.03.2015 is Nil and consider only the income yielding investments if any for the purpose of disallowance under Rule 8D(2)(iii) r.w.s. 14A of the Act.
In so far as the disallowance under Rule 8D(2) is concerned, we direct the Assessing Officer to examine whether the assessee for the year ended 21.03.2015 has sufficient interest free funds for making investments which yielded dividend income during the year under consideration and if the interest free funds are more than the investments there cannot be any disallowance under Rule 8D(2)(ii).
The AO shall examine this aspect with reference to the financials of the assessee and decide in accordance with law after providing adequate opportunity to the assessee.
In so far as the contention of the assessee that there is no satisfaction recorded and the decision of the Tribunal in assessee’s own case applies to the current assessment year, we noticed that there was no suo moto disallowance made by the assessee u/s 14A towards expenditure incurred for earning exempt income during the current assessment year. On perusal of the assessment order, we noticed that the AO on examination of the audited financials of the assessee and considering the replies furnished by the assessee, recorded that he is not satisfied with the replies furnished by the assessee. Since the assessee had not made any suo moto disallowance there was no occasion for the AO to examine the expenditure incurred for earning exempt income. Therefore, the contention of the assessee that no satisfaction has been recorded is apparently not correct as the AO considered the reply and examined the financials and recorded his satisfaction that he is not satisfied with the submissions of the assessee that no expenditure has been incurred for earning exempt income.
In so far as the decision of the Tribunal in assessee’s own case for earlier assessment years, we noticed that the Tribunal in para 8 5 observed that the Hon’ble Delhi High Court in the case of I.P. Support Services (India) Ltd. 378 ITR 240 held that “no disallowance be made in the absence of satisfaction as to why voluntarily disclosure made by assessee was unreasonable and unsatisfactory”. The Tribunal also observed that similar view had been taken by the Hon’ble Delhi High Court in the case of CIT Vs. Taikisha Engineering India Ltd. 370 ITR 338 (Del). In the assessment year under consideration since the assessee has not made any suo moto disallowance the ratios of the above decisions cannot be applied in the facts of the assessee’s case for the assessment year under consideration. Thus, the contention of the assessee that there was no satisfaction recorded and therefore no disallowance can be made u/s 14A is rejected.
In the result, the appeal of the Revenue and the cross objection of the Assessee are partly allowed for statistical purpose.
Order pronounced in the open court on 30.07.2025