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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SMT. ANNAPURNA GUPTA & Ms. SUCHITRA KAMBLE
All the above appeals relate to the same assessee, for different assessment years i.e. A.Y. 2011-12, 2014-15 & 2015-16 and are against separate orders passed by the Ld. Commissioner of Income Tax (Appeals), (hereinafter referred to as “CIT(A)”), National Faceless Appeal Centre (hereinafter referred to as “NFAC”), Delhi under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as the “Act”), all dated 31.01.2024. While both the assessee and department are in cross appeal before us for A.Y. 2011-12 & 2014-15, for A.Y. 2015-16 only the assessee has come up before us.
At the outset itself, Ld. Counsel for the assessee stated that for all 3 assessee’s appeals for A.Y. 2011-12, 2014-15 & 2015-16 in 573 & 574/Ahd/2024; respectively, the assessee has opted to settled the dispute under the VSV Scheme, 2024. Copy of Form No.2, being acceptance of assessee’s application for settlement of dispute under the scheme by the Department, for A.Y. 2011-12 & 2014-15 was filed before us. For A.Y. 2014-15, the assessee’s application seeking settlement of the dispute submitted to the department in Form No.1 was filed before us.
Ld. DR fairly agreed that in the light of the assessee having opted to settle the dispute under the VSV Scheme, 2024 as to 574, 554 & 555/Ahd/2024 [Pratham Investments] - 3 – evidenced by Form No.1 & 2 filed for the different assessment years before us, the appeals may be dismissed as withdrawn.
In view of the factual submissions made by the Ld. Counsel for the assessee before us duly supported with evidences, demonstrating the settlement of the assessee’s dispute under the VSV Scheme, 2024 by way of Form 1 and Form 2 furnished before us, as noted above, the assessee’s appeals are treated as withdrawn and hence dismissed.
In the light of the above, the assessee’s appeals in 573 & 574/Ahd/2024 are dismissed as withdrawn.
Now taking up department’s appeals in A.Y. 2011-12 & 2014-15 in & 555/Ahd/2024 respectively. it was common ground that the solitary issue pertains to the disallowance of interest expenses relating to the earning of exempt income, in terms of the provisions of Section 14A of the Act amounting to Rs.2,86,58,206/- and Rs.1,99,40,540/- for A.Ys. 2011-12 & 2014- 15; respectively, which was deleted by the Ld. CIT(A). It was pointed out that the disallowance of interest was made by computing the same in terms of the method provided in Rule 8D(2)(ii) of the Income Tax Rules, 1962 (in short ‘IT Rules’). Our attention was drawn to the grounds raised in this regard by the Revenue in both years as under: to 574, 554 & 555/Ahd/2024 [Pratham Investments] - 4 – – A.Y. 2011-12
“1. Whether the Ld.CIT(A) was justified in deleting the addition of Rs.2,86,58,206/-made under section 14A read with Rule 8D(2)(ii), without appreciating the findings of the Assessing Officer? 2. Whether the Ld.CIT(A) was justified in deleting the addition of Rs. 2,86,58,206/- made under section 14A read with Rule 8D(2)(ii), without appreciating the fact that the assessee is having mixed funds and that the assessee has incurred interest expenditure to the tune of Rs.2,78,26,692/-, for which the onus was on the assessee to establish that there was no nexus between the investment and interest expenditure? 3. The appellant craves leaves to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal.”
“1. Whether the Ld.CIT(A) was justified in deleting the addition of Rs. 1,99,40,540/-made under section 14A read with Rule 8D(2)(ii), without appreciating the findings of the Assessing Officer? 2. Whether the Ld CIT(A) was justified in deleting the addition of Rs. 1,99,40,540/-made under section 14A read with Rule 8D(2)(ii), without appreciating the fact that the assessee is having mixed funds and that the assessee has incurred interest expenditure to the tune of Rs. 1,99,40,540/-, for which the onus was on the assessee to establish that there was no nexus between the investment and interest expenditure? 3. The appellant craves leaves to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal.”
7. It was common ground that the Ld. CIT(A) had deleted the disallowance for both the years following the consolidated order of the ITAT in the case of the assessee itself for A.Ys. 2010-11, 2012-13 & 2013-14 dated 07.02.2019. It was pointed out that the disallowance of interest u/s.14A of the Act was deleted noting that to 574, 554 & 555/Ahd/2024 [Pratham Investments] - 5 – the assessee had sufficient own funds for making the investments which had earned exempt income during the year and following the order of the ITAT, which held that where sufficient own funds were available it is to be presumed that the investments have been made out of the own interest free funds calling for no disallowance of interest u/s.14A of the Act. It was pointed out that the ITAT in the preceding years had followed the decision of the Jurisdictional High Court in several cases holding so. Our attention was drawn to the findings of the CIT(A) in his order for A.Y. 2011-12 at para 5.2.2 to 5.2.2.4 as under:
“5.2.2 Regarding disallowance of Rs. 2,86,58,206/ under Rule 8D(2)(ii) of the IT Roles, it is seen that in aforesaid decision by the Hon’ble ITAT mentioned supra, the addition for the relevant years in that appeal were deleted on the ground that interest free funds so available with the appellant, exceeded the Interest bearing loans and hence, Investment was made out of own surplus funds. For sake of brevity, the relevant portion of the order of the Hon'ble ITAT mentioned supra is extracted as under. Ground No.2 of the Revenue's appeal concerns reversal of disallowance of Rs.47,78,697/- on account of proportionate interest costs disallowance presumably attributable to the average Investments yielding tax free income in terms of Rule 8D(2)(i) of the IT Rules. With the assistance of the learned AR for the assessee, we notice that the CIT(A) has rightly appreciated the issue having regard to the fact that the assessee holds interest free surplus funds of its own at its disposal in excess of the corresponding investment. In the wake of such facts, the CIT(A) in our view has nightly deleted the disallowance to the extent of Rs.47,78,697/- after taking cognizance of the various judicial precedents. It may be apt to reproduce the relevant operative para of the order of the CIT(A) with which we fully agree: 43.3. I am of the opinion that once the nexus regarding the expenditure on account of interest as being attributable to taxable income is proved before the Assessing Officer no disallowance can be made from interest payment which is directly relatable to taxable income During the year under to 574, 554 & 555/Ahd/2024 [Pratham Investments] - 6 – consideration, Appellant has shown to have sufficient interest free funds available with it. Hon'ble Gujarat High Court in the case of CIT Vs. Gujarat Industrial Development Corporation [2013] 318 Taxman 142 (Guj) has held that it is for the revenue to establish a nexus between the interest bearing funds borrowed and those invested by the assessee respondent and only when it is shown that the interest free funds are not available with the assessee, the question would arise of fastening the tax liability on the assessee. Other decisions of jurisdictional High Court that support the view point of the appellant are CIT Vs. Torrent Power Ltd. [2014] 222 Taxman 367 (Guj.) and CIT VS. UTI Bank Ltd. [2013] 215 Taxman 8 (Gu).) (Mag.). In the case of CIT Vs Hitachi Home and Life Solutions (1) Ltd (2014) 41 Taxman 540 (Guj.), Hon'ble Gujarat High Court has held that where assessee's interest free funds far exceeded investments made for earning exempted dividend income and Assessing Officer had also failed to establish nexus between borrowed funds and investments made, no disallowance could be made under section 14A. As the Appellant has shown the nexus of the interest expenditure to separate direct sources of income chargeable to tax, the application of Rule 8D(2) does not arise and I am of the view that the Assessing Officer has erred in calculation the amount of Rs. 47,78,697/- under this sub rule. Considering various judicial decisions cited by the Appellant including the jurisdictional High Court which are in favour of the appellant this addition is directed to be deleted.
10. This apart, we also notice another significant plea of the assessee that direct nexus was also proved between the borrowed funds and the taxable income by the assessee and consequently proportionate disallowance of interest expenditure purportedly incurred for tax free income in terms of Rule 8D(2)(ii) is uncalled for. We thus decline to interfere with the conclusion drawn by the CIT(A) in this regard, Ground No.2 of the Revenue's appeal is accordingly dismissed." 5.2.2.2 The facts for this FY are similar as well. While interest free funds in form of Reserve and Surplus in form of Partner's Capital as on 31.03.2011 stood at Rs. 39,14,51,879/-, the funds expended in shares held as investment in the Balance sheet stood at Rs. 31,40,36,767/-. 5.2.2.3 Hence, respectfully following the decision of the Hon'ble Jurisdictional Tribunal in case of the appellant & with the facts being found to be similar, it is held that since appellant had to 574, 554 & 555/Ahd/2024 [Pratham Investments] - 7 – sufficient own funds to undertake investment in shares, the disallowance of Rs. 2,86,58,206/-under Rule 8D(2)(ii) is hereby deleted. 5.2.2.4 Hence, 14A disallowance on Investment portfolio is quantified @ 0.5 percent of avg. Investments as per Rule 8D(2)(iii) i.e. Rs. 15,72,748/- made in assessment and being confirmed in this appellate order. As the quantum of addition made in assessment has been reduced from Rs. 3,02,30,955/- to Rs. 15,72,749/-, appellant gets relief to the tune of Rs. 2,86,58,206/-. Hence, ground no. 7 is treated as Partly Allowed.” It was common ground that identically the disallowance for A.Y. 2014-15 was also deleted by the Ld. CIT(A).
Before us, the Ld. DR was unable to controvert the findings of the Ld. CIT(A) both on facts and on law.
In the light of the same, we see no reason to interfere in the order of the Ld. CIT(A), who we hold has rightly deleted the disallowance of interest amounting to Rs.2,86,58,206/- made u/s.14A of the Act in A.Y. 2011-12 and Rs.1,99,40,540/- for A.Y. 2014-15, following the proposition of law laid down by the Jurisdictional High Court that where sufficient own interest free funds are available, no disallowance of interest u/s.14A of the Act is called for and recording a finding of fact in both the assessment years of the assessee having sufficient own interest free funds for making the impugned investments which had earned exempt income.
The grounds raised
by the Revenue, therefore we hold, are devoid of merits and are accordingly dismissed for both the A.Ys. 2011-12 & 2014-15. to 574, 554 & 555/Ahd/2024 [Pratham Investments] - 8 –
11. In effect, both the appeals of the Revenue in & 555/Ahd/2024 for A.Y. 2011-12 & 2014-15 are dismissed.
In effect, all the appeals; both of the assessee and Revenue are dismissed.
This Order pronounced on 15/05/2025 Sd/- Sd/- (SUCHITRA KAMBLE) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 15/05/2025 S. K. SINHA True Copy आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. 2. ��यथ� / The Respondent. संबं�धत आयकर आयु�त / Concerned CIT 3. 4. आयकर आयु�त(अपील) / The CIT(A)- �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. गाड� फाईल / Guard file. 6. आदेशानुसार/ BY ORDER,