ACIT CENTRAL CIRCLE - 26, NEW DELHI vs. PUNJ LLOYD LTD, NEW DELHI

The Revenue has taken the following grounds of appeal:-

Briefly stated, the assessee company is engaged in the business of engineering, procurement, construction and project management services. The assessee filed its return for AY 2015-16 on 28.11.2015 declaring loss of Rs. 875,39,91,399/-. Initially the case was selected for limited scrutiny through CASS but later on converted to complete scrutiny. Statutory notice(s) were issued/served in response to which requisite details were furnished which have been examined and placed on record by the Ld. Assessing Officer (“AO”).

Aggrieved by the impugned disallowance under section 14A r.w. Rule 8D, the assessee appealed before the Ld. CIT(A). It was contended before him that the Ld. AO did not counter the submission of the assessee that no expense has been incurred and claimed for earning exempt income. The disallowance is made on the assumption that the provision of section 14A r.w. Rule 8D is automatic and mandatory even though no expenses have been incurred in relation to earning exempt income. The Ld. CIT(A) directed the Ld. AO to delete the impugned disallowance observing as under:-

The Revenue is dissatisfied and is in appeal before the Tribunal and both the grounds relate thereto.

The Ld. DR placed reliance on the order of the Ld. AO and submitted that the assessee did not establish nexus between interest free funds and investment yielding exempt income and that finding of the Ld. CIT(A) is contrary to Rule 8D(ii) and (iii) of the Income Tax Rules, 1962.

The Ld. AR, on the other hand, supported the order of the Ld. CIT(A) and relied on the decision of Hon’ble Supreme Court in Maxopp Investment Ltd. vs. CIT (2018) 91 taxmann.com 154(SC) and South Indian Bank Ltd. vs. CIT (2021) 130 taxmann.com 178 (SC).

We have considered carefully the submission of the parties and perused the records. It is not in dispute that the assessee on its own made disallowance of Rs. 4,44,270/- under section 14A of the Act. It is observed that the Ld. AO has not recorded his satisfaction regarding correctness of self disallowance made by the assessee under section 14A as is mandatory in terms of sub-section (2) of section 14A to invoke and take recourse to Rule 8D. In such a scenario Hon’ble Delhi High Court held in Pr. CIT vs. Keshav Power Ltd. (2019) 112 taxmann.com 323 (Del) that disallowance is not sustainable. The Revenue filed SLP before the Hon’ble Supreme Court against the order (supra) of the Hon’ble Delhi High Court which stands dismissed reported in (2020) 268 Taxman 331 (SC). Similar is the view expressed by the Hon’ble Bombay High Court in Pr. CIT vs. Reliance Capital Asset Management Ltd. (2017) 251 Taxman 68 (Bom), SLP against which has been dismissed by the Hon’ble Supreme Court reported in (2018) 259 Taxman 83 (SC). Moreover, the Ld. CIT(A) recorded the finding that sufficient own funds were available with the assessee to make investment in shares on which no interest was being paid and that interest bearing funds were utilised only for purposes of business. The above finding could not be controverted by bringing on record any material by the Ld. DR. If that be so, the decision of Hon’ble Supreme Court in South Indian Bank Ltd. (supra) squarely applies to the facts of the assessee’s case wherein it is held that if interest free funds available with the assessee exceeded their investment in tax free securities, investments would be presumed to be made out of assessee’s own funds and no disallowance is warranted. It may be stated that there is no requirement of law either under section 14A or Rule 8D that the assessee should establish nexus between interest free funds and investment which yields exempt income.

For the reasons set out above, we endorse the findings of the Ld. CIT(A) and reject the appeal of the Revenue.

In the result, appeal of the Revenue is dismissed.