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Facts
The assessee company's appeal was filed with a delay of 57 days, which was condoned. The core issue concerns the disallowance made by the Assessing Officer under Section 14A of the Income Tax Act read with Rule 8D. The assessee had earned dividend income and voluntarily disallowed a portion of expenditure, which was found insufficient by the AO.
Held
The Tribunal held that the revised Rule 8D(2), effective from 02.06.2016, applies to the assessment year 2017-18. The assessee's arguments regarding sufficient own funds and the applicability of old rules or judicial precedents were rejected.
Key Issues
Whether the disallowance under Section 14A read with Rule 8D is justified, considering the applicability of the amended rules and the assessee's claim of sufficient own funds for investment.
Sections Cited
14A, 143(2), 142(1), 8D
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Before: Shri S.S. Viswanethra Ravi & Shri Jagadish
O R D E R
PER S.S. VISWANETHRA RAVI, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order dated 30.05.2024 passed by the ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi for the assessment year 2017-18.
We find that this appeal is filed with a delay of 57 days. The assessee filed an affidavit for condonation of delay stating the reasons. Upon hearing both the parties and on examination of the said affidavit, we find the reasons stated by the assessee are bonafide, which really prevented in filing the appeal in time. Thus, the delay is condoned and admitted the appeal for adjudication.
The assessee raised ground No. A to I in the grounds of appeal
amongst which, the only issue emanates for our consideration as to whether the ld. CIT(A) is justified in confirming the disallowance made by the Assessing Officer under section 14A of the Income Tax Act, 1961 [“Act” in short] r.w. Rule 8D of Income Tax Rules, 1962.
4. Brief facts relating to the issue are that the assessee is a company, engaged in the business of manufacturing and trading of petrochemical products. The assessee filed return of income declaring total income of ₹.42,42,23,100/-. Under scrutiny, notices under section 143(2) of the Act and section 142(1) of the Act were issued. In the scrutiny proceedings, the assessee was asked to show-cause why provisions of Rule 8D of the IT Rules should not be invoked for computing disallowance under section 14A of the Act. The Assessing Officer, considering the accounts of the assessee, held that the quantum of disallowance made by the assessee for the purpose under section 14A of the Act is not admissible in the light of facts of the case. The Assessing Officer, accordingly proceeded to invoke the provisions of Rule 8D(2) and made disallowance of ₹.33,78,870/- under Rule 8D(2)(ii) being 1% of average value of the 3 monthly average of opening and closing balances of the value of investments vide his order dated 18.11.2019 under section 143(3) of the Act. The assessee, not satisfied with the order of the Assessing Officer, preferred an appeal before the ld. CIT(A), wherein, the CIT(A)/NFAC upheld the order of the Assessing Officer in invoking the provisions of Rule 8D(2) of the IT Rules, against which, the assessee is in appeal before us challenging the order of the ld. CIT(A).
The ld. AR Shri P.V. Sudakar, CA submits that the ld. CIT(A)/NFAC is wrong, in not considering the fact that the assessee was possessed sufficient funds and reserves in excess of investments made in shares and securities and no borrowings were involved. He submits that the borrowings were only for working capital purposes and argued vehemently that no disallowance should be made towards interest expenditure. Further, he submits that the ld. CIT(A)/NFAC has failed to note and consider the well settled principle that when the assessee is able to establish availability of mixed funds including borrowed funds, the presumption is to be drawn in favour of the assessee, that investments made in shares and securities is out of own funds and disallowance of interest expenditure does not arise. He referred to the decision of Hon’ble High Court of Gujarat in the case of CIT v. Sintex Industries Ltd. [TCA No. 291 of 2017] and argued that no disallowance of expenditure in respect of interest and administrative expenses if the assessee has own surplus funds. Further, he argued that the SLP of Respondent Revenue was dismissed by the Hon’ble Supreme Court. Further, he argued that the ld. CIT(A)/NFAC failed to consider the only those investments which yielded exempt income needs to be considered for arriving at disallowance of expenditure and the Assessing Officer and the ld. CIT(A) was wrong in taking total investments including investments which did not yield any exempt income. He referred to the order of this Tribunal for the AY 2013- 14, 2015-16 & 2016-17 in assessee’s own case and argued to remand the matter to the file of the Assessing Officer to find out whether surplus funds are available or not. Further, he submits that the assessee at his own disallowed ₹.11,69,000/- on notionally for which no satisfaction was recorded by the Assessing Officer. He prayed to allow the grounds of appeal.
The ld. DR Ms. Gauthami Manivasagam, JCIT submits that there is no basis for the argument of the ld. AR in arguing that no interest is to be disallowed in the facts and circumstances of the case. She submits that old Rule 8D(2)(i), (ii) & (iii) was substituted by Finance Act, 2016 with clause (i) & (ii) under Rule 8D(2) of IT Rules. The said substitution came into effect from 02.06.2016. She argued that the year under consideration being 2017-18, new Rule, which was substituted with effect from 02.06.2016 is applicable and the ld. CIT(A) rightly upheld the order of the Assessing Officer. She argued that the decision of the Hon’ble High Court of Gujarat is not applicable as it considered old Rule pertaining to the assessment year 2009-10. She also argued that the orders of this Tribunal, as relied on by the ld. AR, also not applicable in view of change in the amended Rule position with effect from 02.06.2016. Further, she vehemently argued that the Assessing officer recorded his satisfaction regarding the accounts of the assessee and found the disallowance made by the assessee on its own was not acceptable. Further, the disallowance made by the assessee on its own has no basis and the assessee failed to show on what basis the said suo motu disallowance made. The ld. DR prayed to dismiss the ground of appeal.
7. Heard both the parties and perused the material available on record. We note that the assessee admittedly earned dividend income of ₹.1,69,81,000/-. The assessee disallowed ₹.11,69,655/- on account of expenditure in earning the said dividend income. The Assessing Officer in his order considered the said disallowance and held the working provided in support of the same is not admissible in the light of the facts of the 6 case vide para 3.1 of his order, which clearly shows that the Assessing Officer recorded satisfaction regarding the accounts of the assessee in expressing his dissatisfaction with the working and disallowance thereon provided by the assessee. Therefore, the contention of the ld. AR is not acceptable that there was no satisfaction recorded by the Assessing Officer regarding the working of accounts provided by the assessee in respect of dividend income. Further, the ld. AR argued that the assessee has surplus reserves to make investments and no disallowance on the payment of interest is permissible. The ld. DR vehemently argued that there was no provision relating to disallowance of interest in the new Rule came into effect from 02.06.2016 and the Assessing Officer rightly proceeded to invoke new Rule 8D(2), which came into effect from 02.06.2016. On perusal of the substitution to sub-Rule (2) to Rule 8D, we find, prior to its substitution, the sub-rule (2) has 3 clauses, viz., (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) incurring expenditure by way of interest and under clause (iii) an amount equal to one-half per cent of the average of the value of investment. Therefore, we find the argument of the ld. AR does not sound good in view of the amendment under IT (Fourteenth Amdt.) Rules, 2016 to sub-Rule (2) to Rule 8D w.e.f. 02.06.2016. Admittedly, the year under consideration is AY 2017-18 and the substitution to sub-Rule
(2) to Rule 8D came into effect from 02.06.2016, which correctly attracts the year under consideration. Further, as rightly argued by the ld. DR that the decision of the Hon’ble High Court of Gujarat in the case of CIT v. Sintex Industries Ltd. (supra) and the orders of this Tribunal in assessee’s own case for AY 2013-14, 2015-16 & 2016-17 are also not applicable as they were passed in terms of old Rule 8D(2), prior to amendment w.e.f. 02.06.2016. Further, the argument of the ld. AR that the ld. CIT(A) fell in error in confirming the order of the Assessing Officer in considering those investments which did not earn dividend income for disallowance of expenditure, is not acceptable and rejected in view of the new substitution came into force from 02.06.2016. Thus, we find no infirmity in the order of the ld. CIT(A) and the grounds raised by the assessee are dismissed.
In the result, the appeal filed by the assessee is dismissed.