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Facts
The assessee, a non-banking financial company, filed its income tax return for AY 2017-18. The Assessing Officer (AO) noted that the assessee had earned exempt income and suo motu disallowed a certain amount as expenditure. The AO, however, computed a higher disallowance under Section 14A read with Rule 8D.
Held
The Tribunal held that for computing disallowance under Rule 8D(2) based on average investment, only investments yielding exempt income should be considered. The Tribunal found no factual distinction from a previous identical case and upheld the first appellate authority's decision.
Key Issues
Whether disallowance under Section 14A should be computed based on all investments or only those yielding exempt income, and whether amended provisions of Finance Act, 2022 are applicable.
Sections Cited
14A, 8D(2), 8D(2)(ii), 8D(2)(iii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, VP & SHRI NARENDRA KUMAR BILLAIYA, AM
O R D E R Per Saktijit Dey, VP: The captioned appeal by the Revenue and cross objection by the assessee arise out of a common order dated 23.01.2025, passed by learned Commissioner of Income Tax (Appeals)-47, Mumbai (ld. CIT(A) for short) for the assessment year (A.Y. for short) 2017- 18.
The grounds raised by the Revenue are as under:
CO No.116/Mum/2025 (A.Y. 2017-18) DCIT vs Edel Finance Company Limited “1. Whether on the facts and circumstances and in law the ld. CIT(A) was justified in not considering that as per the amended provisions of the Finance Act, 2022, section 14A shall apply to a case irrespective of whether exempt income has accrued or received during the previous year relevant to an assessment year and expenditure has been incurred during the said previous year in relation to such exempt income?”
2. Whether on the facts and circumstances and in law the ld. CIT(A) was justified in not considering that amended provisions of the Finance Act, 2022 has nullified several judgements as relied by the assessee wherein it was held that no disallowance u/s. 14A of the Act could be made in respect of any expenditure incurred in earning any exempt income, in the absence of any exempt income?”
3. Whether on the facts and circumstances and in law the ld. CIT(A) was justified restricting the addition of Rs.2,35,53,078/- made by Assessing Officer u/s. 14A r.w.s. 80D(2)(iii) to Rs.7,67,694/-, without appreciating the facts that there is no evidence furnished by the assessee to prove that the borrowed funds on which interest is paid by it, are directly attributed to earning of taxable income only?”
As could be seen from the grounds raised, the solitary dispute is with regard to disallowance made u/s. 14A of the Income Tax Act, 1961 (‘the Act’ for short) read with Rule 8D.
Briefly the facts are, the assessee is a resident corporate entity and is a non-banking financial company (NPFC) engaged in the business of financing and corporate lending. For the assessment year under dispute, the assessee had filed its return of income on 28.11.2017, declaring total income of Rs.90,98,78,600/-. Subsequently, the assessee filed a revised return of income on 29.03.2019, declaring income of Rs.97,07,78,360/-.
In course of assessment proceeding, the Assessing Officer (AO), while verifying the return of income filed by the assessee, noticed that in the previous year relevant to assessment year under dispute, the assessee had earned exempt income to the tune of Rs.13,09,11,686/-. Whereas, suo motu the assessee has disallowed an amount of Rs.10,55,162/- u/s. 14A, being expenditure attributable to earning of exempt income.
Being of the view that the suo motu disallowance made by the assessee is not in accordance with section 14A read with Rule 8D, the A.O. proceeded to compute the disallowance by amount of Rs.2,46,08,240/- under Rule 8D(2)(ii). The assessee having made suo motu disallowance of Rs.10,55,162/-, the A.O. made a net disallowance of Rs.2,35,53,078/-. The disallowance so made was contested by the assessee before the first appellate authority inter alia on the ground that while rejecting the suo motu disallowance made by the assessee, the A.O. has not recorded proper satisfaction in terms with section 14A(2) of the Act. The assessee further submitted that disallowance, if any, u/s. 14A read with Rule 8D(2) has to be made only after considering the investments which have yielded exempt income during the year. In this context, the assessee furnished a fresh computation, computing disallowance under Rule 8D(2) based on the average value of investment which yielded exempt income during the year under consideration.
After considering the submissions of the assessee, the first appellate authority, in principle, agreed that the disallowance under Rule 8D has to be made by considering only those investments which yielded exempt income during the year. Since, as per the fresh computation made by the assessee after considering the investments yielding exempt income during the year, the disallowance worked out to Rs.18,22,856/-, whereas, the assessee had disallowed an amount of Rs.10,55,162/-, the first appellate authority made further disallowance of Rs.7,67,694/-.
Before us, the learned Departmental Representative ('ld. DR' for short) relied upon the observations of the A.O. Whereas, the ld. Counsel appearing for the assessee reiterated the stand taken before the first appellate authority. Further, he submitted that while bench has upheld identical decision of the first appellate authority.
We have considered rival submissions and perused the materials on record. The crux of the issue is, what should be the average value of investment for computing disallowance of indirect (administrative) expenses under Rule 8D(2). Now, it is fairly well settled through a catena of judicial precedents that while computing disallowance under Rule 8D(2) based on average value of investment, only those investments can be considered, which have yielded exempt income during the year under consideration. In other words, the investments which have not yielded any exempt income during the year, cannot form part of average value of investment. Undisputedly, the first appellate authority, while deleting major part of the disallowance has followed the settled legal position. In fact, while considering the legality of identical view expressed by the first appellate authority in assessee’s case in A.Y. 2018-19, the Tribunal, in dated 10.09.2024 has upheld the decision of first appellate authority. In the impugned assessment year, no factual distinction has been brought to our notice by the ld. DR. That being the case, we do not find any justifiable reason to interfere with the decision of the first appellate authority. So far as assessee’s cross objection is concerned, in our view, while rejecting suo motu disallowance made by the assessee, the A.O. has recorded his reasoning.
Therefore, it cannot be said that the rejection of assessee’s computation is without recording any dissatisfaction. In any case of the matter, under identical facts and circumstances, the cross objection filed by the assessee in A.Y. 2018-19 (supra) was not entertained. In view of the aforesaid, we are not inclined to entertain the ground raised in the issue.
In the result, both the appeal and cross objection are dismissed.