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Facts
The Revenue appealed against the CIT(A)'s order deleting disallowances made by the AO. These disallowances included Rs. 3,62,49,879/- under Section 14A r.w. Rule 8D(2)(i) for interest expenditure related to exempt income, and Rs. 61,91,173/- under Section 36(1)(iii) for advancing interest-free/low-interest loans to group concerns. The assessee had substantial interest-free funds, which exceeded its investments and the loans provided.
Held
The Tribunal upheld the CIT(A)'s decision, confirming that no disallowance under Section 14A for interest expenditure or Section 36(1)(iii) for interest-free loans was warranted. This was based on the principle that when sufficient interest-free funds are available, it is presumed that investments and loans are made from those funds. The Tribunal also noted the AO's failure to record satisfaction before invoking Rule 8D for Section 14A disallowance, as required by law. All grounds of appeal raised by the Revenue were dismissed.
Key Issues
Whether disallowance under Section 14A read with Rule 8D for expenditure incurred to earn exempt income is justified when interest-free funds exceed investments. Whether the Assessing Officer is mandated to record satisfaction before invoking Rule 8D. Whether disallowance under Section 36(1)(iii) for providing interest-free loans to group concerns is valid when the assessee possesses sufficient own funds.
Sections Cited
Section 14A, Rule 8D, Section 36(1)(iii), Section 14A(2)
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Income Tax Appellate Tribunal, PUNE BENCHES “B” :: PUNE
Before: MS.ASTHA CHANDRA & DR.DIPAK P. RIPOTE
ORDER
PER DR. DIPAK P. RIPOTE, AM:
This appeal filed by the Revenue is against the order of ld.Commissioner of Income Tax(Appeal)[NFAC], passed under section 250 of the Income Tax Act, 1961 dated 05.02.2025emanating from the assessment order under section 143(3) r.w.s 144C(3/4) of the Act, 1961 dated 23.01.2017 for the A.Y.2013-14. The Revenue has raised the following grounds of appeal :
[D] “1. Whether on facts and circumstances of the case, the Ld.CIT(A) was justified in deleting the disallowance of Rs.3,62,49,879/- made under Section 14A r.w. Rule 8D(2)(i) of the Income-tax Rules, 1962, without appreciating that the assessee had incurred substantial interest expenditure and maintained mixed funds, and had failed to establish a one-to-one nexus between interest-free funds and the investments yielding exempt income.
Whether on facts and circumstances of the case, the Ld.CIT(A) was justified in not appreciating that the AO had duly recorded satisfaction regarding the incorrectness of the assessee's claim in accordance with Section 14A(2), thereby justifying invocation of Rule 8D for determining the disallowance.
Whether on facts and circumstances of the case, the Ld.CIT(A) was justified in relying solely on the assessee's balance sheet figures without verifying actual fund flow or utilization, and ignoring that the assessee's interest bearing funds were used interchangeably for business and investment purposes, warranting proportionate disallowance under Rule 8D(2)(i). 4 Whether on facts and circumstances of the case, the Ld.CIT(A) was justified in deleting the disallowance of Rs. 61,91,173/- made under Section 36(1)(u) of the Income-tax Act, 1961, despite the fact that the assessee had advanced interest-free/low-interest loans to group concerns while claiming substantial interest deduction on borrowed capital.
Whether on facts and circumstances of the case, the Ld.CIT(A) was justified in holding that interest free loans were made out of own funds merely based on availability of reserves, without examining the actual usage of borrowed funds and daily cash/fund position.
The appellant craves leave to add, amend, delete or modify any of the grounds of appeal
at the time of hearing.” Findings & Analysis :
2. We have heard both the parties and perused the records. In this case, the Assessee had earned exempt income and accordingly the Assessee suo-moto had made disallowance u/s14A of Rs.10,00,000/-. The Assessing Officer calculated the disallowance 2 [D] u/s.14A read with rule 8D of the Income Tax Rules at Rs.4,11,77,507/-. The AO gave credit to suo-moto disallowance of Rs.10,00,000/-. The AO made addition of Rs.4,01,77,507/- u/s.14A read with Rule 8D.
2.1) It is noted that during assessment proceedings the Assessee had claimed that it has more Interest free funds than the investments hence as per the decision of Hon’ble Bombay High Court no disallowance was required. In the Assessment Order the AO has not analyzed this aspect and mechanically calculated disallowance as per Rule 8D of the Income Tax Rules.
2.2) The Assessee filed appeal before Commissioner of Income Tax(Appeal). The Ld.CIT(A) partly allowed the appeal of the assessee. Relevant paragraphs of the order of the Ld.CIT(A) are reproduced here under : “As is clear from the submissions, the Appellant has own funds amounting to Rs. 835.57 crores which include Share Capital and Reserves of Rs. 699.65 crores and interest free funds in the form of trade payable liabilities of Rs. 135.91 crores which are more than the investment of Rs. 197. 18 crores (including both current investments of Rs.29.01 crores and non-current investment of Rs. 168.17 crores) made by the Appellant during the year. It therefore emanates from the submissions that the investments made by the Appellant stands covered by it sown funds. Further, placing reliance on the judgement of Hon'ble Bombay High Court in the case of HDFC Bank Ltd vs DCIT (2016) 383 ITR 529 3
(Bom), following its own earlier judgement in Reliance Utilities & Power Ltd (2009)178 Taxmann 135, wherein the court held that Investments on which interest free income is earned should be presumed to have been made out of interest-free funds if both interest- free and interest-bearing funds are available. Considering the facts of the case and applying the ratio of the case laws cited above, in the instant case, as the Appellant has more than sufficient interest-free own funds available to make investments, on which tax-exempt income is earned, there appears no merit in disallowing any part of interest expenditure debited to Profit & Loss Account as attributable to the earning of said exempt income. Therefore, the addition made by the AO amounting to Rs.3,62,49,879/- on this account under Rule 8D(2)(ii) is deleted. Coming to the second aspect of the disallowance made by the AO under Rule 8D(2)(iii) on account of administration and general expenses being 0.5% of the average value of investments, investments considered to be 'strategic investment' by the Appellant, if any. need to be excluded for computing the disallowance under the above referred rule. For holding the above, in addition to the submissions with respect to the facts and cogent reasons cited by the Appellant, reliance is also placed on the Order of the Hon'ble Pune Tribunal in Appellant own case for AY 2015-16 and AY 2008-09. Since the Appellant has already made a suo-moto disallowance the same should be considered while computing the disallowance. In absence of any such strategic investments which ought to be excluded, the disallowance made by the AO would stand. The AO is directed to recompute the disallowance as per the above directions. Thus, this ground of the Appellant is partly allowed for statistical purposes.” 2.3 Thus, the Ld.CIT(A) has given categorical finding that Assessee had more Interest Free Funds than the Investments made to earn the Exempt income. Ld.CIT(A) has followed the decision of Hon’ble Bombay High Court in the case of HDFC Bank Ltd 383 ITR 529 and Reliance Utilities & Power Ltd . 4 2.4 Hon’ble Supreme Court in the case of South Indian Bank Ltd. Vs. CIT [2021] 438 ITR 1(SC)[09-09-2021] has held as under : Quote, “27. The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under section 14A of Income Tax Act for investments made in tax-free bonds/securities which yield tax-free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, weunhesitatingly agree with the view taken by the learned ITAT favouring the assessees.” Unquote.
2.4) Hon’ble Bombay High Court in the case CIT vs Reliance Utilities & Power Ltd 313 ITR 340 has held as under : Quote, “The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest- free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments.” Unquote.
2.5) Hon’ble Bombay High Court in the case of CIT Vs. HDFC Bank Ltd [2014] 366 ITR 505 (Bombay), following the earlier decision in the case of Reliance Utilities & Power Ltd has held as under : Quote, “5. We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities & Power Ltd. (supra). The finding of fact given by the ITAT in the present case is 5 that the Assessee's own funds and other non-interest bearing funds were [D] more than the investment in the tax-free securities. This factual position is not one that is disputed. In the present case, undisputedly the Assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Utilities & Power Ltd. (supra), it would have to be presumed that the investment made by the Assessee would be out of the interest- free funds available with the Assessee. We therefore, are unable to agree with the submission of Mr Suresh Kumar that the Tribunal had erred in dismissing the Appeal of the Revenue on this ground. We do not find that question (A) gives rise to any substantial question of law and is therefore rejected.” Unqoute.
2.6) Thus, the law laid down on the issue is that when Interest free funds are more than Interest bearing funds then it is presumed that Investments have been made out of Interest Free Funds. In this case ld.DR has not disputed the facts mentioned by the Ld.CIT(A) in the order. Ld.AR read out the relevant facts mentioned by CIT(A) in his order.
2.7 Therefore, we are of the opinion that Ld.CIT(A) has applied the preposition of law correctly in deleting the impugned addition.
3) Vide Ground No.1 the Pr.Commissioner of Income Tax has submitted that ld.CIT(A) has erred in not appreciating the fact that Assessee had not established one to one Nexus between Interest free Funds and Investments.
3.1) We have carefully read the Assessment Order, the AO has no where mentioned the issue raised by Pr.CIT in the ground number 1. The law laid down by Hon’ble Supreme Court and Hon’ble High Court (supra) is that when Interest Free Funds are available then it is presumed that Investments were made out of Interest free Funds. In this situation AO has not brought on Record any fact which will rebut the presumption.
3.2) Therefore, for all the reasons discussed above the Ground Number 1 raised by revenue is Dismissed.
Ground No.2 : 4. ld.The ld.CIT(A) has decided the issue of 14A based on the fact that Interest Free funds were more than Interest bearing funds. No where the ld.CIT(A) has discussed the issue of recording Satisfaction by the AO. In these facts the Ground number 2 is not emanating from the Order of the CIT(A).
4.1) However, on reading the Assessment Order we are of the considered opinion that the AO has not recorded his satisfaction qua the suo-moto disallowance made by the assessee and accounts of the assessee.
4.2) Hon’ble Bombay High Court in the case of PCIT Vs. Godrej & Boyce Mfg. Co. Ltd/[2023] 292 Taxman 497 (Bombay)[20-02 2023] has held as under regarding Recording of Satisfaction by AO : Quote, “11. In the present case, the assessee had earned an exempt income of Rs.84,30,37,423/- from shares and mutual funds and submitted a computation of inadmissible expenditure u/s 14A amounting to Rs.13,66,635/-. The assessee claimed that the disallowance made u/s14A was as per the books of account attributable to earning of exempt income. On a perusal of the assessment order we find that there is no discussion by the AO with regard to the computation of inadmissible expenditure made by the assessee forming part of the return of income. Further, the AO has not recorded any satisfaction that the working of inadmissible expenditure u/s14A is incorrect with regard to the books of account of the assessee. The provision u/s 14(2) does not empower the AO to apply Rule 8D straightaway without considering the correctness of the assessee's claim in respect of expenditure incurred in relation to the exempt income. We agree with the view of the ITAT that in the present case the AO has neither examined the claim in respect of expenditure incurred in relation to exempt income of the assessee nor has recorded any satisfaction with regard to the correctness of assessee's claim with reference to the books of account. Consequently, the disallowance 8 Rule 8D is not only against the statutorymandate but contrary to the legal principles laid down. In our view too, the CIT (A) has rightly deleted the addition made on account of interest expenditure as the assessee had sufficient interest free surplus fund to make the investment and the ITAT has rightly deleted the disallowance made by the AO u/s 14A r.w Rule 8D. Consequently we hold that, the interest expenditure cannot be disallowed u/s 14A r.w. Rule 8D(2)(ii) under any circumstances” Unqote. (emphasis supplied)
4.3 Hon’ble Bombay High Court in the case of Pr.CIT vs Tata Capital Ltd 475 ITR 559 (Bombay)[03-04-2024] has held as under : Quote, “7. We agree with the finding of the CIT(A) and the ITAT that though the AO has stated that Assessee's explanation is not acceptable, he has not given reasons why it was not acceptable to him. Subsection (2) of Section 14A and Rule 8D provides that if the Assessing Officer is not satisfied with the correctness of the claim in respect of expenditure made by Assessee in relation to income which does not form part of the total income under the Act, he shall determine the amount of expenditure in relation to such income in accordance with the provisions prescribed. The most fundamental requirement, therefore, is the Assessing Officer should record his dissatisfaction with the correctness of the claim of Assessee in respect of the expenditure and to arrive at such dissatisfaction, he should give cogent reasons. We find support for this view in a judgment of this Court in Pr. CIT (Central) v. JSW Energy Ltd. [2023] 153 taxmann.com 208/294 Taxman 407/[2024] 460ITR 496 (Bom.)” Unqoute.
4.4) Thus, the AO was required to record satisfaction qua suo moto 9 disallowance made by the assessee with reference to books of [D] account. In this case we have noted that AO has not recorded any such satisfaction.
4.5) In these facts, respectfully following Hon’ble Bombay High Court (supra), the Ground number 2 is dismissed.
Ground Number 3 : 5) We have already mentioned that when Interest Free Fund are more than Interest bearing funds presumption is that Investments were made from Interest Free Funds. Therefore, the Assessee was not required to prove the same. The onus was on AO to rebut the presumption by bringing relevant facts on record. AO has not brought any evidence on record. Hence ground number 3 is dismissed.
Ground number 4 & 5 : 6) Ld.CIT(A) has discussed this issue in para 5.3 of the order which is reproduced here under : “5.3 Findings and Reasons
I have carefully considered the facts of the case, the AO's order and the submission filed by the appellant.
It is seen that the computation of disallowance made by the AO is based 10 on the negative balance appearing in respect of the sister concerns
As has been noted above in earlier part of this Order, the Appellant has sufficient interest-free funds to the tune of Rs. 835.56 crores as on March 31, 2012, which is more than sufficient to cover the interest-free/ low interest loans advanced to its sister concerns totaling to Rs. 45.03 crores as on March, 31, 2013
Moreover, referencing the judgment of the Hon'ble Bombay High Court in HDFC Bank Ltd vs DCIT (2016) 383 ITR 529 (Bom), which adhered to its earlier judgment in Reliance Utilities & Power Ltd (2009) 178 Taxmann 135, where the court determined that investments generating interest-free income should be considered as having been made from interest-free funds if both interest-free and interest-bearing funds are available.
Taking into account the specifics of the case and applying the principles established in the aforementioned case laws, since the Appellant possesses ample interest-free funds to make investments that yield tax- exempt income, there is no justification for disallowing the quantum of interest foregone by not charging/low charging interest on loans advanced to its sister concerns u/s 36(1)(iii) of the Act. Consequently, the addition made by the AO amounting Rs.61.91 lakh is deleted.”
6.1) Thus, Ld.CIT(A) has followed the decision of Hon’ble Bombay High Court. The Ld.DR and AO has not brought on record any contrary fact. Hence, respectfully following Hon’ble Bombay High Court the ground number 4 & 5 raised by the Revenue are dismissed. 11 8) In the result, Appeal of the Revenue is Dismissed. Order pronounced in the open Court on 27 January, 2026.