ACIT CIRCLE-7(1), NEW DELHI vs. DLF HOME DEVELOPERS LTD, NEW DELHI

The only ground raised by the Revenue is with regard to disallowance of Rs.1,36,00,64,114/- made u/s 14A read with Rule 8D. huge investments in non-current investments at Rs.2,26,759.15 lacs and has earned exempt income of Rs.167.83 lacs. For the purpose of attribution of earning exempt income, assessee had suo moto disallowed an amount of Rs.14,96,887/-. AO proceeded to make disallowance under Rule 8D and computed the disallowance at Rs.1,36,15,61,000/- after giving credit of suo moto disallowance of Rs.14,96,887/-, and addition Rs.1,36,00,64,113/- was sustained.

Before the ld. CIT (A), assessee had submitted that firstly, the assessee had huge interest free funds available which are more than Rs.4,94,048.40 lacs whereas an amount of Rs.1,92,750.91 lacs have been invested in shares. It was categorically submitted that no funds were invested in interest bearing funds. The following chart was also given to provide the availability of interest free funds :-

Apart from that, it was submitted that nowhere AO has recorded his satisfaction on why disallowance offered by assessee is incorrect or he has examined the expenditure having regards to books of account. Apart from that, it was also submitted that the Tribunal in assessee’s own case for AY 2011-12 has decided the issue in favour of the assessee on the same facts.

In the given circumstances in order to invoke the provisions contained under section 14A read with Rule 8D, the Assessing Officer was required to record his dissatisfaction that the computation made by the assessee u/ s 14A is not correct, however, when we examine the Assessment Order, nowhere dissatisfaction has been recorded by the AO nor any reason been given as to how the computation made by the assessee, making suo moto disallowance of expenses of Rs.8,21,883/-, is not correct nor the AO has disputed the fact that the assessee was having own sufficient interest free funds available with it to make the investment in the year under assessment.

When the assessee was having sufficient interest free own funds to the tune of Rs.2,95,937/- lacs no disallowance can be made under Rule BD(2)(ii) as the assessee has not incurred any expenses on account of payment of interest.

Hon'ble High Court of Bombay in case cited as CIT-2, Mumbai vs. HDFC Bank Ltd. – (2014) 49 taxmann.com 335 (Bombay) while dealing with the identical issue held that when the assessee’s own funds and other non-interest bearing funds were more than investment in tax free securities no disallowance on account of interest payment under section 14A can be made.

Furthermore, the AO has not recorded his dissatisfaction as to the computation made by the assessee company that no expenditure has been made by the assessee company during the year under assessment to earn the interest free income rather proceeded mechanically by extracting the bare language of Rule 8D. Hon'ble Apex Court in Godrej & Boyce Manufacture Company Ltd vs. DCIT - 394 ITR 449 (SC) thrashed the issue in controversy as to invoking of the provisions contained under Rule 8D of the Rules by observing as under "37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule BD of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule BD or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable." ......

Moreover, when the assessee has come up with categoric plea that the entire investment have been made out of its own interest free funds available and the incurred expenses have been suo moto disallowed and the AO has not pointed out any defect in the computation made by the assessee company, provisions contained u/ s 14A read with Rule BD are not attracted which can only be invoked if the AO is not satisfied with the claim of the assessee.

So far question of sustaining the addition of Rs.1128.93 lacs under Rule BD(2)(iii) by Ld. CIT(A) on account of administrative expenses to earn the exempt income is concerned, again, we are of the considered view that when the AO as well as Ld. CIT(A) have not recorded their dissatisfaction that the computation of expenses disallowed by the assessee are not correct nor has pointed out any specific computation defects, the same cannot be sustained as Rule 8D(2) has only prescribed a formula to determine expenditure incurred to earn the exempt income which does not form part of the total income under the Act, which cannot be invoked unless AO has not come up with specific dissatisfaction with the claim of the assessee. So, in these circumstances addition sustained by Ld. CIT(A) under Rule 8D(2)(iii) is not sustainable, consequently, Ground no. 4 raised

We have heard the rival submissions and also perused the relevant finding given in the impugned orders. First of all, we find that AO in his entire order except giving his general remarks has nowhere given any categorical satisfaction as to how the working of suo moto disallowance made by the assessee for the purpose of attributing the expenditure for earning exempt income is incorrect having regard to the accounts maintained by the assessee. Interestingly the AO has noted that assessee has not made any disallowance u/s 14A, therefore, he is not satisfied with the correctness of the assessee even when suo moto disallowance was offered which is evident from the following observations:- ./2019 “Assessee has not made any disallowance u/s 14A of the Income Tax Act. The undersigned Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. Hence, the disallowance u/s 14A needs to be recalculated.”

Thus, it clearly shows that AO has not applied his mind even the working of the assessee and has mechanically proceeded to make the disallowance not only under Rule 8D(2)(ii) and under Rule 8D(2)(iii).

First of all, it is not in dispute that assessee had huge interest free funds which have also been noted by the CIT (A). Thus, now in view of the judgments of Hon’ble Supreme Court in the case of South Indian Bank vs. CIT, 438 ITR 1, wherein it has been held that where assessee had interest free funds available which exceeds the investment made in tax free fund security then no interest expenditure can be disallowed and it has to be presumed that it is out of assessee’s own fund and proportionate disallowance could not warrant under section 14A even where no separate accounts were maintained by the assessee and other expenditure made for earning tax free income. Hon’ble Supreme Court clearly held that if assessee had mixed funds, made up partly of interest free funds and partly of interest-bearing funds and payment has been made out of mixed funds, then the investment must be considered to have been made out of interest free funds. It is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it would be not permissible for the Revenue to make an estimation of a proportionate figure. Disallowance could be legally using interest free funds under Section 14A. Thus proportionate disallowance of interest is not warranted under section 14A for investments made in tax-free bonds/ securities which yielded tax free dividend and interest to assessee banks where interest free funds are available exceeded their investments. Thus no disallowance on account of section 14A can be made.

Further, we find that AO has not recorded his satisfaction while proceeding to make the disallowance under Rule 8D. The contention of the ld. CIT DR does not find any support from the order of AO that he has recorded his satisfaction albeit he has not even applied his mind on the facts before him which is evident from the fact that he has not even seen the working of disallowance offered by the assessee before him. Therefore, aforesaid finding of the ld. CIT (A) which is based on earlier year order of the Tribunal is confirmed and accordingly, entire disallowance made u/s 14A is deleted. The appeal filed by the Revenue is dismissed.