Loading judgment…
Facts
The assessee, a company engaged in trading and acting as a commission agent for iron ore, filed its return of income, which was subsequently revised. The Assessing Officer (AO) completed the assessment by making additions under Section 43B, disallowance under Section 14A, and for unrecorded receipts. The CIT(A) granted relief for the additions under Section 43B and unrecorded receipts but confirmed the disallowance under Section 14A.
Held
The Tribunal held that the disallowance under Section 14A for interest expenditure is not warranted, as the assessee had sufficient interest-free funds for investments, relying on the 'Reliance Utilities' case. It was further held that the 0.5% disallowance under Rule 8D(2)(ii) should be restricted only to investments that yielded exempt income, as per the 'Vireet Investment' decision. The AO's satisfaction for applying Rule 8D was implicitly present through his detailed analysis.
Key Issues
1. Whether disallowance of interest expenditure under Section 14A is justified when the assessee has sufficient interest-free funds for investments. 2. Whether the AO adequately recorded satisfaction before applying Rule 8D(2) for disallowance under Section 14A. 3. The scope of disallowance of 0.5% of average investments under Rule 8D(2)(ii).
Sections Cited
14A, 43B, 10(34), 8D
AI-generated summary — verify with the full judgment below
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SMT. BEENA PILLAI & SHRI ARUN KHODPIA
Per: Smt. Beena Pillai, J.M.: The Present appeal filed by the assessee arises out of order dated 30/04/2025 passed by Ld.CIT(A) 51, Mumbai for the assessment year 2011-12 on following grounds of appeal:
“First Ground of Appeal:
A.Y. 2011-12 Moorgate Industries India Pvt Ltd 1. The Commissioner of Income Tax (Appeals) has erred in confirming addition of Rs. 83,10,892 made under section 14A of the Income Tax Act, 1961 by the Assessing Officer. 2. The appellant prays that the disallowance u/s.14A of Rs. 83,10,892 be deleted.” Brief facts of the case are as under:
The assessee is a company engaged in the business of trading and acts as commission agent of iron ore and fines. It is a part of Stemcor a multinational group, which is into the business of Iron and steel. For this under consideration the survey filed its return of income on 13/11/2011 declaring total income of Rs.10,78,79,090/-. The return was subsequently revised on 03/02/2012 declaring total income of Rs.10,78,79,091/-. The case was selected for scrutiny and various statutory notices were issued. 2.1 From the submissions filed by the assessee after considering the evidence the Ld.AO completed the assessment by making addition of Rs.2,82,33,366/-under section 43B on account of unpaid service tax and disallowance under section 14A amounting to Rs.2,82,10,892/-. The Ld.AO further added Rs.4,15,020/- as unrecorded receipts. Aggrieved by the order of the Ld.AO, assessee preferred an appeal before the Ld.CIT(A).
The Ld.CIT(A) granted relief to the assessee in respect of the addition made under section 43B and deleted the addition made towards unrecorded receipts. However, confirmed the disallowance made under section 14A of the Act. Aggrieved by the order of the Ld.CIT(A), assessee preferred appeal before this Tribunal.
A.Y. 2011-12 Moorgate Industries India Pvt Ltd 4. At the outset the Ld.AR submitted that no suo moto disallowance was made by the assessee against the dividend earned amounting to Rs.20,99,99,790/-. The primary argument of Ld.AR is that, the investments made by the assessee were in its subsidiary companies which was a part of strategic investment for the purposes of business and hence the expenditure incurred were for the purposes of business. He submitted that no disallowance can be made against such a trading activity which was purely on account of commercial expediency. 4.1 The Ld.AR further submitted that in any event the investments are out of the reserve and surplus funds already available with the assessee. He submitted that there are sufficient own funds available with the assessee to support the investments made with subsidiary companies. Placing reliance on the decision ofHon’ble Supreme Court in case of South Indian Bank Ltd vs CIT reported in (2021) 130Taxmann.com 178 and the decision of Hon’ble Bombay High Court in case of CIT vs Reliance Utilities& Power Ltd reported in (2009) 178 Taxmann.com135, the Ld.AR submitted that interest free own funds are available with the assessee that exceeds the investments, then it is presumed that the investments would be made out of assessee is owned fund and no proportional disallowance was warranted under section 14A under the limb rule 8D (2)(ii) towards the interest expenses. 4.2 He further submitted that the Ld.AR has computed 0.5% of the average investments towards the disallowance under the second limb of rule 8D (2) of the act. He submitted that the Ld.AR A.Y. 2011-12 Moorgate Industries India Pvt Ltd has not recorded the satisfaction which is the mandatory prerequisite for applying rule 8D (2). He submitted that as an necessary requisite has not been met by the Ld.AO, the disallowance made under the second limb of rule 8D(2) towards the average investment cost is bad in law.
On the contrary, the Ld.DR placed reliance on the decision of honourable Supreme Court in case of Hon’ble Supreme Court in case of Maxopp Investment Ltd. Vs. CIT reported in (2018) 91 taxmann.com 154. He submitted that Hon’ble Supreme Court in case of Maxopp Investment Ltd. Vs. CIT (supra) on applicability of section 14A is very clear in respect of investments by an assessee for controlling interest. 5.1 The Ld.DR placed reliance on paragraph nos. 39 - 40 of the decision of Hon'ble Supreme Court that held as under:
“(39) In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as 'income' under the head 'profits and gains from business and profession'. What happens is that, in the process, when the shares are held as 'stock-in-trade', certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10(34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share and Stock Brokers P Ltd. case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned. (40) We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT (A) disallowed A.Y. 2011-12 Moorgate Industries India Pvt Ltd the entire deduction of expenditure. That view of the CIT (A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those cases where shares are held as 'stock-in-trade', it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes up in order to earn profits. In the result, the appeals filed by the Revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove.” (emphasis supplied) 5.2 The Ld.DR submitted that the view of Hon’ble Courtin para 40 very categorically held that, the dominant intention is not important for the purposes of computing disallowance under section 14A. As the assessee acquired shares in the subsidiary company to hold it as investment, whatever may be the dominant purpose, disallowance under section 14A r.w.Rule 8D is mandatory, if the assessee earns dividend from such investments.
In respect of recording of satisfaction by the Ld.AO in order to make disallowance under section 14A (2), the Ld.AR submitted A.Y. 2011-12 Moorgate Industries India Pvt Ltd that the fact that the assessing officer considered the profit and loss of the accounts of the assessee and specifically picked up certain items from the financial statements clearly indicates that the Ld.AO has gone through the financial statements based on which the disallowance is restricted only in respect of the interest expenditure for the purposes of computing disallowance under section 14A. He submitted that this argument of the assessee do not have any basis.
We have perused the submissions advanced by both sides in the light of the records placed before us.
The only issue contested by the assessee in the present appeal is in respect of disallowance made by the Ld.AO under section 14A read with Rule 8D (2) of the act.
7.1 The Ld.AR tried to press upon by submitting the dominate purpose is to have controlling interest in order to submit that no disallowance is to be made. This argument is no longer relevant as observed by Hon’ble Supreme Court reproduced herein above. Once a proximate cause for disallowance is established – which is the relationship of the expenditure with income which does not form part of the total income, a disallowance u/s.14A has to be effected. And those expenditures incurred to earn exempt income cannot be allowed as business expenditure.
7.2 It is relevant to note the observation of Hon’ble Delhi High Court in case of Indiabulls Financial Services Ltd. vs. DCIT(supra) in respect of recording satisfaction by the Ld.AO. While interpreting the provisions of section 14A, Hon’ble Court observed that the satisfaction is to be drawn by the Ld.AO based on the A.Y. 2011-12 Moorgate Industries India Pvt Ltd suo moto disallowance by the assessee having regards to the accounts of the assessee. Hon’ble Court observed as under: “7. Undoubtedly, the language of Section 14A presupposes that the AO has to adduce some reasons if he is not satisfied with the amount offered by way of disallowance by the assessee. At the same time Section 14A (2) as indeed Rule 8D(i) leave the AO equally with no choice in the matter inasmuch as the statute in both these provisions mandates that the particular methodology enacted should be followed. In other words, the AO is under a mandate to apply the formulae as it were under Rule 8D because of Section 14A(2). If in a given case, therefore, the AO is confronted with a figure which, prima facie, is not in accord with what should approximately be the figure on a fair working out of the provisions, he is but bound to reject it. In such circumstances the AO ordinarily would express his opinion by rejecting the disallowance offered and then proceed to work out the methodology enacted.
8. In this instance the elaborate analysis carried out by the AO - as indeed the three important steps indicated by him in the order, shows that all these elements were present in his mind, that he did not expressly record his dissatisfaction in these circumstances, would not per se justify this Court in concluding that he was not satisfied or did not record cogent reasons for his dissatisfaction to reject the AO's conclusion. To insist that the AO should pay such lip service regardless of the substantial compliance with the provisions would, in fact, destroy the mandate of Section 14A.” 7.3 It is noted that, for the year under consideration, under Rule 8D(2)(ii), the Ld.AO computed disallowance considering the investments alone. It is also noted that, admittedly, disallowance of proportionate interest expenditure is made by the Ld.AO. At this juncture, Rule 8D is necessary to be read: 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with—
(a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been A.Y. 2011-12 Moorgate Industries India Pvt Ltd incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:— (i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income : Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee. 7.4 Further from the show cause notices issued by the Ld.AO it is clear that the evidences and documents were called upon by Ld.AO. Though there was interest expenditure claimed by the assessee in its profit and loss account, Ld.AO computed proportionate disallowance under the second limb of sub-clause 2 of Rule 8D. Thus, the argument advanced by the Ld.AR that, there is non application of mind and that, no satisfaction is recorded by the Ld.AO, deserves to be rejected.
7.5 It is noted from the financials of the assessee that sufficient interest-free funds are available for the purposes of investments. If there are funds available, then a presumption arises that investments would be out of the interest-free fund generated or available with the assessee. Under such circumstances, no expenses can be said to have incurred in relation to the A.Y. 2011-12 Moorgate Industries India Pvt Ltd investment in shares, and therefore no disallowance under section 14 A r.w. Rule 8D was called for. Reliance is placed on the decision of Hon’ble Bombay High Court in case of CIT vs. Reliance Utilities & Power Ltd.reported in (2009) 178 Taxman 135.
We therefore do not find any merit in the addition made sustained by the Ld.CIT(A) in respect of the interest expenditure and the same is deleted.
In respect of the disallowance at 0.5% of the average investment, We are of the of the opinion that 0.5% of the investments that yielded exempt income only needs to be considered as per the decision of Hon’ble Delhi Special Bench decision of this Tribunal in the case of ACIT vs. Vireet Investment (P.) Ltd. reported in (2017) 82 axmann.com 415. We therefore direct the Ld.AO to restrict the disallowance of 0.5% only in respect of the investments that yielded exempt income.
Accordingly the grounds raised by the assessee stands partly allowed. In the result the appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 28/10/2025