2016 (6) TMI 529 - AT - Income Tax

Tribunal allows appeal, directs deletion of disallowances under Rule 8D based on assessee's own funds exceeding investments.

M/s Bhupinder Investment Co. Pvt. Ltd. Versus Dy. Commissioner of Income Tax Circle 10 (2), Mumbai

The Tribunal partly allowed the appeal, directing deletion of disallowances under Rule 8D(2)(ii) and Rule 8D(2)(iii) as the assessee's own funds exceeded ... Disallowance u/s 14A r.w.r 8D - Held that:- From the records, we find that the assessee’s own fund comprising the share capital and reserves were to the tune of ₹ 20,06,22,262/- vis a vis the investments in shares of ₹ 11,12,76,771/- and the loan funds were ₹ 5,19,09,835/- at the year end. Thus ,it is amply clear from the above facts that the assessee’s own funds were far more than the value of investments in shares and there is merit in the submissions and arguments of the ld. counsel of the assessee that disallowance under rule 8D (2)(ii) of ₹ 13,99,868/- was not justified. Further, the case of the assessee is fully covered by the decision of the jurisdictional High Courts. In the case of CIT V/s RELIANCE UTILITIES AND POWER LTD. [2009 (1) TMI 4 - BOMBAY HIGH COURT ] it has been held that if both funds are available with the assessee i.e. interest bearing funds and interest free funds then the presumption would arise that investment made would be out of interest free funds available with the company, if the interest free funds are sufficient to meet the investments. So far as the addition made under rule 8D(2)(iii) is concerned, the assessee company has demonstrated before us that the AO has completely ignored the facts of strategic investments of ₹ 1,36,65,695/- in the associate concerns which were intended not for the purpose earning gain or tax free income but to acquire the control over those concerns. A working of the disallowance under section 14A r.w.r 8D was also filed by the assessee which was arrived at after reducing the amount of investments in strategic concerns ₹ 1,36,65,695/- and investment in growth scheme of Mutual funds ₹ 8,15,61,466/- as on 31.3.2008 from the total value of investments of ₹ 11,12,76771/- and thus the disallowance u/s 14A r.w.r.8D 2(iii) was worked out at ₹ 60,809/- which is in our opinion is the correct amount of disallowance. In view of the above facts we direct the AO to delete the addition of ₹ 13,99,868/- as made u/r 8D(2)(ii) and ₹ 2,92,780/- as made u/r 8D (2)(iii). - Decided partly in favour of assessee. Issues:Confirmation of disallowance u/s 14A of the Income Tax Act, 1961 read with Rule 8D.Detailed Analysis:Issue 1: Confirmation of disallowance u/s 14A of the Income Tax Act, 1961 read with Rule 8D:The appeal was against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance under section 14A of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed expenses amounting to Rs. 17,53,454/- related to exempt income earned by the assessee. The AO applied Rule 8D and calculated the disallowance. The Commissioner upheld the AO's decision, stating that the provisions of Rule 8D were applicable for the assessment year in question. The Commissioner found that the indirect interest expenditure was attributable to investments made by the assessee and upheld the disallowance. The assessee contended that the investments were made out of own funds and not borrowed capital. However, the Commissioner held that the AO's satisfaction under section 14A(1) was correct, making the disallowance justified.Issue 1 Analysis:The Tribunal considered the contentions of both parties and examined the financial details provided. It was observed that the assessee's own funds exceeded the value of investments, indicating that the disallowance under Rule 8D(2)(ii) of Rs. 13,99,868/- was not justified. The Tribunal referred to relevant High Court decisions, such as CIT v/s RELIANCE UTILITIES AND POWER LTD. and CIT v/s HDFC BANK LTD., which supported the assessee's position. The Tribunal concluded that the disallowance under Rule 8D(2)(ii) could not be sustained. Regarding the disallowance under Rule 8D(2)(iii), the Tribunal found that the AO overlooked strategic investments and non-tax-free income yielding investments made by the assessee. After considering the details provided by the assessee, the Tribunal directed the AO to delete the additions made under Rule 8D(2)(ii) and Rule 8D(2)(iii) accordingly.Conclusion:The Tribunal partly allowed the appeal of the assessee, directing the deletion of the disallowances made under Rule 8D(2)(ii) and Rule 8D(2)(iii) based on the financial evidence presented and relevant legal precedents.---