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Facts
The revenue preferred an appeal against the order of the CIT(A) who deleted the disallowance of Rs. 1,90,53,475/- made by the AO under Section 14A of the Act. The assessee earned dividend income, and the AO disallowed expenses related to it. The assessee claimed it had sufficient own interest-free funds and did not use borrowed funds for investments.
Held
The Tribunal considered that while no borrowed funds were used for investments, it is possible that employees/directors invested some time in making investment decisions. Therefore, a reasonable disallowance for administrative expenses related to earning exempt income is warranted.
Key Issues
Whether the disallowance under Section 14A read with Rule 8D is applicable when the assessee claims to have sufficient own interest-free funds for investments, and if so, to what extent.
Sections Cited
14A, 10, 143(1), 8D(2), 8D(1)
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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI NARENDRA KUMAR BILLAIYA, HON’BLE & SHRI RAJ KUMAR CHAUHAN, HON’BLE
PER NARENDRA KUMAR BILLAIYA, AM: This appeal by the revenue is preferred against the order dated 14/06/2024 passed by NFAC, Delhi [hereinafter ‘ld. CIT(A)’] pertaining to AY 2017-18. 2. The solitary grievance of the revenue is that the ld. CIT(A) erred in granting relief to the assessee company by deleting the disallowance of Rs. 1,90,53,475/- made by the AO u/s 14A of the Act without appreciating that the provision of Rule 8D(2) had changed substantially w.e.f. AY 2017- 18 and hence the decision of the Hon’ble ITAT for earlier years did not apply to this year.
Briefly stated the facts of the case are that the assessee filed its return of income on 30/11/2017 declaring total income at Rs. 181,74,17,720/-. The return was processed u/s 143(1) of the Act and subsequently selected 2 for scrutiny and accordingly notices were issued and served upon the assessee.
During the course of scrutiny assessment proceedings, the AO noticed that the assessee has earned dividend income of Rs. 9,78,13,306/- which is claimed as exempt u/s 10 of the Act. The AO found that the assessee has not made any disallowance u/s 14A r.w.r 8D and, therefore, asked the assessee to explain why the disallowance u/s 14A r.w.r. 8D should not be done for the exempt income shown. The assessee filed detailed reply claiming that it did not incur any expenditure towards the earning of any exempt income and all expenditure debited to profit and loss account are incurred for the rating business of the company and they are directly or indirectly related to earning tax free income and hence no part of expenditure incurred are required to be allocated to earning tax free income.
Reply of the assessee was dismissed by the AO who proceeded by computing the disallowance as per Section 14A r.w.r 8D and computed the disallowance at Rs. 1,90,53,475/-.
Assessee carried the matter before the ld. CIT(A) and vehemently contended that they are not bank loans or unsecured loans and the assessee has sufficient, own interest free funds to make the impugned investments. After considering the facts and the submissions, the ld. CIT(A) was convinced that no interest-bearing funds were invested in mutual funds or bonds by the assessee since the assessee possessed sufficient funds of its own. Drawing support from the decision of the Hon’ble Juri ictional High Court in the case of HDFC Bank reported in 3 383 ITR 52 and the Hon’ble Supreme Court in the case of South Indian Bank V/s CIT (2021) 438 ITR 1 (SC), deleted the entire addition made by the AO.
Before us, the ld. D/R fairly submitted that the assessee has no interest-bearing funds and, therefore, there is no question of application of Rule 8D(1) but Rule 8D(2) squarely applies and the assessee ought to have made certain disallowance suo-moto in respect of administrative expenses. The ld. Counsel for the assessee reiterated what has been stated before the lower authorities.
We have carefully considered the orders of the authorities below. There is no dispute that the investments were not made out of any borrowed funds or interest-bearing funds but we find that the AO has also not made any disallowance on this aspect. In our considered opinion, it cannot be ruled out that some employees/director must have invested some time in making the investment decisions. Therefore, to that extent, reasonable disallowance needs to be made. Considering the nature of business of the assessee, we are of the considered view that a disallowance of Rs.10 Lakhs, should meet the ends of justice. We, therefore, direct the AO to restrict the disallowance to Rs.10 Lakhs.
In the result, appeal of the revenue is partly allowed. Order pronounced in the Court on 10th October, 2024 at Mumbai. (RAJ KUMAR CHAUHAN) ACCOUNTANT MEMBER Mumbai, Dated 10/10/2024 *SC SrPs SC SrPs SC SrPs SC SrPs 4
आदेश की "ितिलिप अ"ेिषत /Copy of the Order forwarded to : अपीलाथ" / The Appellant
""थ" / The Respondent 2. संबंिधत आयकर आयु" / Concerned Pr. CIT 3. 4. आयकर आयु" अपील ( ) / The CIT(A)- िवभागीय "ितिनिध ,आयकर अपीलीय अिधकरण, मुंबई /DR,ITAT, Mumbai, 5. 6. गाड" फाई/ Guard file.
आदेशानुसार/ BY ORDER,