ACIT , MUMBAI vs. RELIANCE POWER LTD , MUMBAI

O R D E R

Per Arun Khodpia, AM:

raised by the revenue in the present appeal are culled out as under:

1. On the facts and in the circumstances of the case and in law, the Id.CIT(A) failed to appreciate the fact that the AO has rightly made disallowance u/s.14A as envisaged under section 14A r.w.Rule 8D of the Act r.w.s.36(1)(iii) and section 37(1) of the Act.

2. On the facts and in the circumstances of the case and in law, the ld.CIT(A) failed to appreciate the fact that the disallowance of expenses needs to be made which covers not only direct expenses but also all kind of expenses towards earning of the exempt income from such investments.

3. On the facts and in the circumstances of the case and in law, the ld.CIT(A) failed to appreciate the fact that the Board Circular No.5/2014 dated 11/02/2014 that notwithstanding anything to the contrary contained in this Act, the provision of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.

4. On the facts and circumstances of the case and in law, if disallowance of expenditure computed as per Rule 8D and made under normal provisions of the Act is not added to the book profit as per section 115JB of the Act as held by the Ld. CIT(A) in this case, it makes the provisions of law in clause (f) in Explanation 1 in Section 115JB of the Act.

5. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) was not justified in directing the AO to re-compute disallowance u/s 14A of the Act without appreciating the fact that the issue stands squarely covered by the decision 2 Reliance Power Ltd. of the Hon'ble ITAT 'D' Bench in the case of ITO vs. RBK Share Broking Put. Ltd. taxman 128(2013) and the decision of the Hon'ble ITAT 'F' Bench in the case of D.C.LT. Cen. Cir. 18 & 19, Mumbai us. Viraj Profiles Ltd. (2015) 64 taxmann.com 52 (Mumbai -Trib.)/2016, 156 ITD 72 (Mumbai - Trib.), wherein it has been held that the provisions of section14Ar.W.r. 8D is applicable for computation of…….”

2. Brief stated, the assessee company had filed its return of income on 29.11.2016 declaring business loss of Rs. 89,56,67,127/- under the normal provisions of Act and the book loss of Rs. 5,08,80,699/- under the provisions of section 115JB of the Act. The return of income was subsequently revised disclosing the equity and preference shares details without any change in the returned income. The case of assessee was selected for scrutiny. During the assessment proceedings, after the deliberations, ld. AO made disallowance of interest under section 14A r.w.r. 8D(2)(ii) for Rs. 24,25,66,541/- and disallowance of expenses under Rule 8D(2)(iii) for Rs. 74,75,05,052/- aggregating to total Rs. 99,00,71,593/-. The assessee had already made a suo-motu disallowance of Rs. 36,91,162/- in its return of income, thereby the net disallowance made by the AO worked out to be at Rs. 98,63,80,431/-.

Reliance Power Ltd. 4. Being aggrieved with the aforesaid addition, assessee preferred an appeal before the ld. CIT(A), who reduced the amount of disallowance by restricting it under section 14A r.w.r. 8D to Rs. 7,33,01,500/-, the relevant observations of the ld. CIT(A) on the issue are extracted as under:

“6.1 The submissions filed by the appellant have been perused along with the assessment order. The grounds of appeal are being decided as under: Ground 1 of appeal is a general ground disputing the disallowance u/s.14A r.w. Rule 8D. Grounds 2 to 5 of appeal are specific grounds of appeal on the above issue of disallowance u/s.14 A of the Act.

6.1.1 The submissions filed by the appellant have been perused. It is noted that as per section 14A(2) and 14A(3) of the Act, the provisions of Rule 8D can be applied, where the AO having regard to the accounts of the assessee is not satisfied with the correctness of the claims of the assessee in respect of the expenditure in relation to exempt income. In this regard, it is noted that the AO, having regards to the accounts of the assessee, was not satisfied with the claims of the appellant that no expenditure has been incurred by it which is related to earning of exempt income, and further was not satisfied with the basis of the amount quantified by the appellant for making suo-moto disallowance under section 14A for the reasons as stated in the assessment order. In this regard, the AO has also placed reliance on certain judicial decisions as mentioned in the assessment order as well as CBDT Circular, also. Therefore, the urgent prejudice claim of the appellant that the AO had erred in invoking the provisions of Rule 8D and in ignoring the provisions of section 14A(1) of the Act are not found correct. Accordingly, Ground 4 of appeal is Dismissed.

6.1.2 The appellant has submitted on a without prejudice basis that no interest disallowance u/s.14A of the Act can be made in case the interest-free funds exceeded the total value of tax free investments. The appellant has pointed out 4 Reliance Power Ltd. that, as on 31.3.2016 and 31.3.2015, its interest free funds exceeded the total value of investments. The break-up of the same as per balance sheets as on 31.3.2015 and 31.3.2016 were submitted by the appellant alongwith the supporting financial statements. The summary of opening and closing value of investments has been submitted by the appellant, which was also submitted before the AO during the assessment proceedings. The appellant has also explained the working of value of tax-free investments in this regard. From the above quoted submissions, it is noted that similar figures were submitted before the AO during assessment proceedings also before the AO, as have been reproduced by the AO in his assessment order. In its submissions on this issue , the appellant has placed reliance on the decisions of the jurisdictional Hon’ble ITAT Mumbai in group company cases – Reliance Infrastructure Ltd. – dated 20.12.2012; Reliance Big Entertainment (P) Ltd – dated 17/08/2016, wherein it was held that when the assessee has more interest- free funds as compared to the investments made by the assessee, no disallowance of interest expenses can be made, and in this regard, Hon’ble ITAT had relied upon the decisions of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Limited (313 ITR 340) and CIT vs. HDFC Ltd. (330 ITR 212). The appellant referred to the decision of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Limited (313 ITR 340), wherein it was held that if there are funds available, both interest free and overdraft and / or loans taken, then a presumption can be drawn that the investments would be out of interest- free funds, and in this regard has also relied upon various other decisions in its above quoted submissions. The appellant further relied upon the decision of Hon’ble Supreme Court in the case of Reliance Industries Ltd. (2019) 102 Taxmann.com 52(SC) affirming the decision of Hon’ble Bombay High Court that if interest-free funds were available to the assessee which were sufficient to meet its investments in subsidiaries, no disallowance under section 36(1)(iii) could be made. It is noted that the above case laws are applicable to the facts of the instant case, since as per the working submitted by the appellant before this office and also before the AO during the assessment proceedings, it had sufficient interest- Reliance Power Ltd. free funds at the beginning and end of the relevant financial year, which exceeded the total tax-free investments made. In its subsequent submissions, the appellant has placed reliance on decision of Hon’ble ITAT, Mumbai in its own case in and Appeal 3043/Mum/2023 for AY.2015-16 and Appeal Nos. 3423/Mum/2023 and Appeal no. 3044/Mum/2023 for AY.2018-19 – orders dated 22.1.2004. It is noted that Hon’ble ITAT in para 13 of its order have held that: “Before us, it was explained that the assessee has share capital and reserves and surplus amounting to Rs. 16,891 crores where the total value of the investment is only Rs. 14,892 crores which included the average of investment in equity and preference shares of the domestic company along with the value of dividend on mutual funds. On appraisal of above figures, it is clear that the assessee has more interest free funds available with it in the form of share capital and reserves and surplus then the amount of investment made which yielded tax free income during the year. Therefore, the presumption would be available in favour of the assessee that amount of investment made in such exempt income yielding investments are made of interest free funds available. Therefore, there could not have been any disallowance under rule 8D (2) (ii)of the income tax rules 1962 under section 14 A of the Act.” It is noted that the appellant has followed the similar methodology in the instant assessment year as was taken in earlier assessment year to claim that its share capital and reserves and surplus were more than the total value of investments which included the average of investment in equity and preference shares of the domestic company along with the value of dividend mutual funds etc. Thus, in appellant’s own case, with respect to the same issue on similar facts, Hon’ble ITAT has held that once on appraisal of such figures, if it is clear that the assessee has more interest free funds available with it in the form of share capital and reserves and surplus than the amount of investment made which yielded tax- free income during the year, a presumption would be available in favour of the assessee that the amount of investment made in such exempt income yielding investments are made of interest free funds available. Based on the above principle, Hon’ble ITAT has held that in such circumstances, no disallowance under Rule 8D(2)(ii) of the Income Tax rules under section 14A can be made.

Reliance Power Ltd. Since, similar facts exist in the instant assessment year also, following the same binding principle enunciated by jurisdictional Hon’ble ITAT in appellant’s own case, the claim of the appellant that no interest disallowance u/s.14A of the Act could be made in its case is found correct. Based on the above discussion, Ground 3 of appeal is considered as Allowed.

6.1.3 The appellant has further submitted, on a without prejudice basis, that no disallowance can be made in its case in respect of investments which have not yielded any exempt income. The appellant claimed that during the year under consideration, it has earned exempted dividend income u/s.10(34) of the Act of Rs.279,97,04,750/- only from investments made by it in the equity and preference shares of its subsidiary Rosa Supply Power Company Limited and hence disallowance pertaining to other investments cannot be made. In this regard, the appellant has relied upon the decision of Hon’ble ITAT Delhi Special Bench in the case of Vireet Investment (P) Ltd. (82 Taxmann.com 415), where it has been held that only those investments are to be considered for computing average value of investment, which yielded exempt income during the year. Besides this, the appellant has also relied upon the decision of Hon’ble ITAT Mumbai rendered in its own case for AYs.2009-10 and 2010-11 in & 5975/Mum/2012 and 5545 & 5743/Mum/2013 - order dated 31.8.2017, wherein it has been held that only such investments are to be considered for computing average value of investment which yielded exempt income during the year for the purpose of computing disallowance under Rule 8D(iii). The appellant has also relied upon other decisions of Hon’ble ITAT in its group cases, where similar principle was enunciated after placing reliance on the decision of Hon’ble ITAT Delhi Special Bench in the case of Vireet Investment (P) Ltd. (82 Taxmann.com 415). In its subsequent submissions, the appellant has placed reliance on decision of Hon’ble ITAT, Mumbai in its own case in and Appeal No.3043/Mum/2023 for AY.2015-16 and Appeal Nos. 3423/Mum/2023 and Appeal no. 3044/Mum/2023 for AY.2018-19 – orders dated 22.1.2004. It is noted that Hon’ble ITAT in para 13 of its order have held that “Further the second issue on Reliance Power Ltd. the assessee’s appeal is that while working out disallowance under section 14 A of administrative expenses under rule 8D (2) (iii) of the act made by the learned assessing officer of Rs. 511,533,421/– could have been made only after taking only those investments which have yielded exempt income during the year. This is also supported by the decision of the honourable High Court in cargo motors private limited versus deputy Commissioner of income tax (145 taxmann.com 641) wherein it has been held that for the purpose of making disallowance of expenses under section 14 A as per rule 8D only those investments were to be considered for computing average value of investments which yielded exempt income during the year. Therefore, both the grounds in the appeal of the assessee are allowed.” Thus, Hon’ble ITAT in the own case of the appellant has held that for working out the disallowance u/s.14A of administrative expenses under Rule 8D(iii) of the Act, only those investments can be considered which have yielded exempt income during the year and in this regard also relied upon the decision of Hon’ble High Court in the case of Cargo Motors Pvt Ltd. (145 Taxmann.com 641). Since similar facts exist in the instant assessment year also, following the same binding principle enunciated by jurisdictional Hon’ble ITAT in appellant’s own case, the claim of the appellant that while working out disallowance as per rule 8D(iii) u/s.14A of the Act, only those investments could be considered which yielded exempt income during the year, is found correct. Accordingly, Ground 2 of appeal is considered as Allowed.

6.1.4 Thus, based on the binding precedent of Hon’ble ITAT orders in the case of appellant itself, there can be no disallowance of proportionate interest expenses under Rule 8D(ii) r.w.s 14A of the Act, and the disallowance under Rule 8D(iii) r.w.s 14A of the Act needs to be reworked by considering only those investments, which have yielded exempt income during the year. In this regard, the appellant has submitted its own computation (as quoted above) as per the principle laid down in the above orders of Hon’ble ITAT, on a without prejudice basis. As per the said computation, the revised quantification of disallowance under section 14 A r.w. Rule 8D would amount to Rs.7,33,01,500/-. Since the appellant has already Reliance Power Ltd. disallowed a sum of Rs.36,91,162/-, the additional disallowance to be made after considering the suo-moto disallowance would amount to Rs.6,96,10,338/-. Thus, as per the above computation submitted by the appellant, the addition made by the AO under section 14A of the Act rwr 8D is required to be confirmed to the extent of said amount of Rs.6,96,10,338/-, and the balance amount of disallowance made is required to be deleted. However, the AO is directed to verify this computation filed by the appellant and thereafter make such disallowance under section 14A of the Act as per the principles laid down in the order of Hon’ble ITAT in the case of the appellant vide ITAT order in and Appeal No.3043/Mum/2023 for AY.2015-16 and Appeal Nos.3423/Mum/2023 and Appeal No.3044/Mum/2023 for AY.2018-19 – orders dated 22.1.2004.

6.1.5 Based on the above, grounds of appeal 1 and 5 are considered as Partly Allowed. 6.1.6 Thus, grounds 1 and 5 are Partly Allowed, grounds 2 and 3 are Allowed and ground 4 is Dismissed.

6.2 Disallowance under section 37/36(1)(iii)/38 of the Act: The appellant has disputed the alternate disallowance made by the AO under section 37/36(1)(iii)/38 of the Act vide grounds 6 to 10 of appeal.

6.2.1 It is noted that the disallowance made by the AO as per these sections has been made alternatively, on a without prejudice basis ,and not in addition to the disallowance made under section 14A of the Act. The appellant has claimed that this proposed alternative disallowance can only be considered, when there is no disallowance made under section 14 A and that there cannot be two disallowances on the same matter. Thus, the primary argument of the appellant is that once the disallowance u/s.14A is made / sustained / partly sustained, no alternate disallowance under sections 37/36(1)(iii)/38 of the Act can be made. Further, the appellant has claimed that it has entered into six transactions relating to investment activity during the relevant FY and that it had suo-moto disallowed expenses attributable to investment activity in its computation filed w.r.t disallowance under section 14Aof the Act. The appellant has claimed that it Reliance Power Ltd. had submitted details of expenditure statement before the AO with its linkage of expenses with the nature of activity whether investment or business, and a copy of the same has also been submitted before this office. The appellant has submitted that the onus was on the AO to pinpoint those expenses which were pertaining to investment activity. The appellant has submitted that the AO cannot adopt another method provided in the Act for a different purpose (disallowance u/s.14A) for making disallowance u/s.36(1)(iii) / 37/38 of the Act.

6.2.2 With respect to attribution of interest expenses towards investments u/s.36(1)(iii) of the Act, the appellant has relied upon the decision of Hon’ble Supreme Court in the case of Reliance Industries Limited (2019) 102 Taxmann.com 52(SC). On perusal of this order of Hon’ble Supreme Court, it is noted that the question of law raised before the Hon’ble Supreme Court was that: - “Whether the High Court is correct in holding that interest amount being interest referable to funds given to subsidiaries is allowable as deduction under section 36(1)(iii) of the Income Tax Act, 1961 (for short ‘the Act’), when the interest would not have been payable to banks, if funds were not provided to its subsidiaries.”. Hon’ble Supreme Court vide its order dated 02/01/2019 has stated that “The High Court has noted the findings of the Tribunal that the interest free funds available to the assessee were sufficient to meet its investments. Hence, it could be presumed that the investments were made from the interest free funds available with the assessee.” It is noted that the appellant has demonstrated before the AO during the assessment proceedings that it had sufficient interest free funds available to meet its investments, and no adverse inference has been drawn by the AO with respect to this factual claim and nothing to the contrary has been pointed out by the AO. In such circumstances, relying on the above- mentioned order of Hon’ble Supreme Court, it has to be presumed that the investments were made from the interest-free funds available with the assessee. The appellant has also relied upon the decision of Hon’ble Supreme Court in the case of South Indian Bank Limited (2021) 130 Taxmann.com 178(SC), where it has been held that when interest-free funds were available to the assessee which Reliance Power Ltd. were sufficient to meet its investments , investments would be presumed to be made out of assessee’s own funds and proportionate disallowance was not warranted under section 14A on the ground that separate accounts were not maintained by the assessee for investments and other expenditure incurred for earning tax free income. Further, in this regard, the appellant has also relied upon the decision of Hon’ble Supreme Court in the case of S.A. Builders Ltd (2007) 158 Taxmann.com 74(SC), as quoted above in its submissions made. Based on the above decisions of Hon’ble Supreme Court, it is clear that no attribution of interest expenses could be made for the purpose of making disallowance under section 36(1)(iii) of the Act. Following the same principle, no attribution of interest expenses could be made for the purposes of making disallowance under section 37 and section 38 of the Act.

6.2.3 Further, it is noted that the AO has invoked the provisions of section 37 of the Act which specify that any expenditure (not being expenditure of the nature described in sections 30 to 36 of the Act, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Thus, the expenses incurred should not be capital expenses or personal expenses, not in nature of expenditure specified in sections 30 to 36 of the Act, and should be laid out or expended wholly or exclusively for the purpose of business shall be allowed in computing the income chargeable under the head “Profits and Gains of business or profession”. Similarly, as per section 38(2) of the Act, Building, etc., partly used for business, etc., or not exclusively so used, deductions u/s. 30 to 32 can be restricted to a fair proportionate part thereof. In this regard, the appellant has claimed that the investments made by it are for the purpose of commercial expediency and for the purposes of advancing/furtherance of its power business interest only, since the investments have been made into its subsidiary companies which are into the same line of business, i.e. power generation only. The appellant has submitted that such investments were strategic Reliance Power Ltd. in nature and made on account of business expediency to wrest control over the companies. In this regard, the appellant has relied upon the concept of “commercial expediency” used by Hon’ble Supreme Court in the case of S.A. Builders (158 Taxmann.com 74(SC). Thus, the appellant has claimed that these transactions are undertaken for commercial expediency and hence constitute business purpose. It is noted that in the assessment order, the AO has not identified any specific item of expenditure to be disallowed under these sections and has made this disallowance under section 37/36(1)(iii)/38 of the Act on an alternate basis only, and has merely adopted the mechanism used for making the disallowance under section 14A of the Act for the purpose of quantifying this alternate disallowance. It is noted that there is merit in the claim of the appellant that the mechanism of working out disallowance u/s 14A rw Rule 8D cannot be automatically imported, while working out the disallowances under section 36(1)(iii), Section 37 and section 38 of the Act. Since the primary disallowance u/s.14A has been partly sustained, the alternative addition made by the AO on a without prejudice basis is not required to be adjudicated in the present appeal.

6.2.4 Without prejudice to the above , the issue is also being discussed on merits . The claim of the appellant is that it has entered into only six transactions of purchase/sale of investments during the relevant financial year and hence no such huge quantum of administrative expenses, conveyance, rent etc. can be attributed to its investment activity carried out during the relevant financial year and no such substantial expenses can be attributed to its investment activity for the purposes of disallowing the same is found to be justified. However, it is noted that the appellant has also accepted attribution of certain administrative expenses viz. salary, conveyance, telephone, printing, business support services etc. while working out its computation of disallowance under section 14A based on certain estimates. Since there can be some attribution of such expenses including building rent etc. towards investment activity, whose exact quantification is difficult, the mechanism used in section 14A was adopted by the AO for working out the alternate disallowance under section 37/36(1)(iii) /38 of the Act, in the assessment Reliance Power Ltd. order. However, it is clear that in view of the above cited decisions, no interest disallowance is possible under section 37/36(1)(iii)/38 of the Act, as was also not possible under Rule 8D(ii) r.w. section 14 A of the Act and the same needs to be estimated with respect to attributable administrative expenses. From the above, it is clear that the alternate disallowance, if any under section 37/36(1)(iii)/38 of the Act would not exceed Rs.6,96,10,338/, as quantified by the appellant under Rule 8D(iii) r.w. section 14 A which is as per the own computation mechanism adopted by the AO in the assessment order for making the impugned disallowances.

6.2.5 Based on the above discussion, it is clear that since disallowance u/s.14 A r.w. Rule 8D has already been partly sustained, while deciding grounds 1 to 5 above, no cause of action arises to decide this alternative disallowance made buy the AO under sections 37/36(1)(iii)/38 of the Act. Without prejudice to the above, the alternative disallowance, if made would not exceed the disallowance amount already sustained under section 14A r.w. Rule 8D and hence no separate/higher addition to the returned income would arise, over and above the sustained amount. Based on the above discussion, grounds 6 to 10 are considered as Partly Allowed.”

Order pronounced in the open court on 17-12-2025.