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Facts
The assessee, a company involved in share broking and other capital market activities, claimed dividend income as exempt. The Assessing Officer (AO) disallowed expenses under Section 14A read with Rule 8D, a disallowance upheld by the CIT(A). The assessee argued that investments were made from own funds, not borrowed funds.
Held
The Tribunal held that the disallowance of interest expenditure under Section 14A, clause (ii) of Rule 8D, was not legally tenable as the assessee's own funds exceeded investments. However, the disallowance pertaining to administrative expenses under clause (iii) of Rule 8D was confirmed.
Key Issues
Whether disallowance under Section 14A read with Rule 8D is justified when the assessee has sufficient own funds for investments, and the treatment of bank charges as interest expenditure.
Sections Cited
14A, 143(3), Rule 8D
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Before: SHRI SANDEEP GOSAIN & SHRI PRABHASH SHANKAR
Appellant by : Shri K. Gopal & Ms Neha Paranjpe,ARs Respondent by : Shri Mahesh Pamnani (Sr. DR) Date of Hearing 24.02.2025 Date of Pronouncement 03.03.2025 आदेश / O R D E R PER PRABHASH SHANKAR [A.M.] :- The above two captioned appeals are filed by the assessee against the orders passed by the Learned Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] pertaining to assessment order u/s 143(3) of the Income- tax Act, 1961 [hereinafter referred to as “Act”] dated 06.12.2016 as passed by the Dy. Commissioner of Income Tax, Circle-4(1)(1), Mumbai for the Assessment Years [A.Y.] 2014-15 & 2015-16. Since the grounds of 126/Mum/2025 A.Y. 2014-15, 2015-16 Chimanlal Maneklal Securities Private Limited appeal and facts of the case are identical and also the appeals having been heard together, both these appeals are being adjudicated in this composite order for the sake of brevity. We take up as the ‘Lead case’ below:
The grounds of both appeals are as under:-
ITA 125/MUM/2025(AY 2014-15) 1. The learned Commissioner of Income-tax (Appeals) has erred in confirming the action of the assessing officer in disallowing an amount of Rs.27,57,464/- under rule 8D read with section 14A of the Income-tax Act 1961 as against of Rs 34,378/- disallowed by your appellant. Your appellant submits that looking to the facts and circumstances of the case and in law, no additional expenses were incurred to earn the exempt dividend income. Your appellants submit that the additional disallowance made by the AO & confirmed by Hon'ble CITA is unwarranted and the same ought to be deleted. Without prejudice to the above, your appellant submits that the learned Assessing officer has considered bank charges of Rs.6,89,640/- as interest expenditure while calculating disallowance under Rule 8D(ii) of Income-tax Rules, 1962. Your appellants submit that bank charges are not interest expenditure and therefore should be excluded from interest expenditure while calculating disallowance under Rule 8D(ii) of the Income-tax Rules, 1962 and the disallowance should be reduced accordingly.
Facts in brief are that the assessee is a company and a member of Bombay Stock Exchange (BSE) capital market segment, 126/Mum/2025 A.Y. 2014-15, 2015-16 Chimanlal Maneklal Securities Private Limited National Stock Exchange (NSE) capital market segment and National Stock Exchange (NSE) Future & Options Segment with business comprising of share broking, trading, jobbing, arbitrage etc. The learned AO has made disallowance of interest expense u/s 14A applying the formula as prescribed under Rule 8D(ii). It is seen that the assessee earned dividend income amounting to Rs.75,57,993/- during the year and has claimed the same as exempt during the year. Further, it allocated an amount of Rs.34,378/- on account of expenditure incurred towards earning of the tax exempt dividend income as required by section 14A of the Act.The AO made disallowance of Rs 27,57,464/- u/s 14A of the Act.
The ld.CIT(A) has considered the issue at length in upholding the action of the AO. Before him, it was contented that the assessee had sufficient reserve and surplus and share capital in comparison to the investment made in dividend yielding instruments. However, it was noted by the ld. AO as well as by the ld.CIT(A) that the assessee did not consider the interest expenses incurred by the assessee for calculating disallowance u/s 14A of the Act, although it had shown huge interest expense in comparison to its interest income and also the assessee had not brought on record any cogent documentary evidence and has not established the cash flow in this regard.In view of the above, it could not 126/Mum/2025 A.Y. 2014-15, 2015-16 Chimanlal Maneklal Securities Private Limited be deduced that the assessee had used its own funds for investments capable of yielding exempt income. Therefore, the interest expenses needed to be considered while working out disallowance u/s 14A of the Act in accordance with Rule 8D of IT Rules, 1962 . Accordingly, the AO worked out the disallowance in terms of Rule 8D clauses(ii) and (iii) of Rs 23,37,819/- and Rs 4,54,023/- respectively.
4.1 Before us,it was submitted by the assessee that summary of the funds available with the company at the beginning of the year showed that the interest free funds available with the company were substantially more as compared to the total investment of the company as on 31/03/2014. Therefore, it could be concluded that the company was in no need to borrow any funds as far as making investments are concerned. Reliance was placed on several case laws where it is held that investments are out of own funds and not out of borrowed funds when the assessee’s own funds and non-interest bearing funds exceeds investment in tax free securities. The ld.CIT(A) upheld the disallowance as the assessee did not file any cash flow statement to demonstrate that surplus fund exceeded investments.
We have carefully considered all the relevant facts of the case. We have also heard rival submissions and perused materials on record.
126/Mum/2025 A.Y. 2014-15, 2015-16 Chimanlal Maneklal Securities Private Limited The ld.DR has relied on the orders of authorities below. In principle, if there are funds available, both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company if the interest-free funds were sufficient to meet the investment. It is noticed that the Share capital and Reserves and surplus in the relevant year amounted to Rs 1.49 cr. and Rs 12.83 cr. respectively aggregating to Rs 14.32 cr. as per the Balance Sheet as on 31.03.2014. On the other hand, the non-current investment made amounted to Rs 8.82 cr. Likewise in AY 2015-16, the Share Capital Reserve amounted to Rs 1.49 cr. and Rs 14.48 cr. respectively aggregating to Rs 15.97 cr. and the investment was Rs 9.93 cr. as on 31.03.2015. Therefore, the assessee’s own funds and other non-interest bearing funds were more than the investment in the tax free securities.
5.1 The courts have consistently held in above stated situation, no disallowance could be made in terms of Rule 8D(ii).The Hon'ble Karnataka High Court in the case of CIT Vs Microlabs Ltd., [2016] 383 ITR 490 (Karn) summed up the law on the issue after noticing the availability of own funds as per Balance Sheet of the assessee and after digesting all decisions on the subject, the Court noticed the decision of the Hon'ble Bombay High Court in Reliance Utilities & 126/Mum/2025 A.Y. 2014-15, 2015-16 Chimanlal Maneklal Securities Private Limited Power Ltd 313 ITR 340 (Bom), which was later confirmed by the Hon'ble Supreme Court in SLP No. 37/2019 vide order dated 02- 01-2019,wherein it was held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. Hon'ble Court referred to the judgment of Hon'ble Bombay High Court in CIT vs. HDFC Banking of 2012 dated 23.7.2014, wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made. Hon'ble Supreme Court in the case of CIT vs UTI Bank Ltd. [2022] 142 taxmann.com 136 and in South Indian Bank Ltd. v. CIT [2021] 438 ITR 1,likewise held that since interest free own funds available with assessee exceeded their investments in tax-free securities, investments would be presumed to be made out of assessee's own funds and proportionate disallowance was not warranted under section 14A of the Act. In this case, since interest free own funds available with assessee exceeded their investments; investments would be presumed to be made out of assessee's own funds and proportionate disallowance was not warranted under section 14A.
126/Mum/2025 A.Y. 2014-15, 2015-16 Chimanlal Maneklal Securities Private Limited 5.2 Respectfully following the above judicial precedents rendered by Hon'ble Apex Court and various High Courts, we hold that the disallowance u/s 14A under clause(ii) of Rule 8D is legally not tenable and liable to be deleted. The AO is therefore, directed to delete the same.
However, as far as the addition made in respect of administrative expenses u/s 14A r.w clause(iii) of Rule 8D is concerned, we find sufficient merits in the assessment order. It is relevant to mention here that Rule 8D was notified by Central Board of Direct Taxes (CBDT) by the IT (5th Amdt) Rules, 2008 w.e.f. 24.03.2008. Thus, it is applicable for the impugned assessment year. In Godrej & Boyce Mfg. Co. Ltd. v. Deputy Commissioner of Income Tax reported in [2010] 328 ITR81 (Bom)[2010], the Hon'ble Bombay High Court has explained Rule 8D(2)(iii) as under:
As regard Rule 8D(2)(iii), it had been submitted that some mechanism or formula had to be adopted for attributing part of the administrative / managerial expenses to tax-exempt investment income. The administrative expenses attributable to tax- free investment income have a fixed component and a variable component. A view was taken that the disallowance should also be linked to the value of the investment rather than the amount of exempt income. Under Portfolio Management Schemes (PMS), the fee charged ranges between 2 and 2.5 per cent of the portfolio value which would be inclusive of a profit element for the portfolio manager. While the fixed administrative expenses were excluded on the ground that in the case of a large corporate taxpayer they would be spread over a large number of voluminous activities, the variable expenses were computed at one-half per cent of the value of the investment.
126/Mum/2025 A.Y. 2014-15, 2015-16 Chimanlal Maneklal Securities Private Limited 6.1 Having considered the facts of the case and respectfully following the above decision, we confirm the disallowance of Rs.4,54,023/- made by the AO.
ITA 126/MUM/2025(2015-6) 1. Disallowance u/s 14(A) of Rs. 21,14,912/-. The learned Commissioner of Income-tax (Appeals) has erred in confirming the action of the assessing officer in disallowing an amount of Rs.21,14,912/- under rule 8D read with section 14A of the Income-tax Act 1961 as against of Rs 30,134/- disallowed by your appellant. Your appellant submits that looking to the facts and circumstances of the case and in law, no additional expenses were incurred to earn the exempt dividend income. Your appellants submit that the additional disallowance made by the AO & confirmed by Hon'ble CIT(A) is unwarranted and the same ought to be deleted. Without prejudice to the above, your appellant submits that the learned Commissioner of Income-tax (Appeals) has erred in confirming the action of the assessing officer in considering bank charges of Rs.7,36,229/- as interest expenditure while calculating disallowance under Rule 8D(ii) of Income-tax Rules, 1962. Your appellant submits that bank charges are not interest expenditure and therefore should be excluded from interest expenditure while calculating disallowance under Rule 8D(ii) of the Income-tax Rules, 1962 and the disallowance should be reduced accordingly.
126/Mum/2025 A.Y. 2014-15, 2015-16 Chimanlal Maneklal Securities Private Limited 8. Since the issue involved in this appeal is exactly identical as also the grounds of appeal
, the decision rendered in 7 above would be applicable mutatis mutandis to this appeal also. Accordingly, appeal of the assessee is also partly allowed.
9. In the result, both the appeals are partly allowed. Order pronounced in the open court on 03/03/2025.