2017 (9) TMI 243 - AT - Income Tax

Tribunal upholds CIT(A)'s decisions on disallowance under Section 14A for AY 2001-02 & 2006-07

The Tribunal upheld the CIT(A)'s decisions, dismissing the Revenue's appeals for AY 2001-02 and 2006-07 regarding disallowance under Section 14A. The ... Addition u/s 14A - expenditure incurred for earning exempt income namely dividend - proof of having own funds - Held that:- When we peruse the availability of funds with the assessee company as on 31.03.2001 in the light of its investment, it goes to prove that the assessee has made investment for earning exempt income during the year under assessment was ₹ 9,04,03,525/- as against the total investment of ₹ 33,65,81,747/-. Assessee was having own funds of ₹ 34,44,42,623/- which are otherwise more than total investment made by the assessee company to the tune of ₹ 33,65,81,747/- Hon’ble Supreme Court in case of M/s. Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT & Anr.(2017 (5) TMI 403 - SUPREME COURT OF INDIA) (SC) affirmed Bombay High Court in Godrej & Boyce Manufacturing Company Ltd. by “explaining the procedure for calculation of disallowance u/s 14A of the Act whereby the condition precedent is expenditure sought to be allowed need actually be incurred for earning dividend income.” So, in these circumstances, the ld. CIT (A) has rightly deleted the addition as the entire investment made by the assessee for earning exempt income was out of free funds available with it. Even otherwise, Rule 8D section 14A is effective from AY 2008-09. So, we find no illegality or perversity in the findings returned by ld. CIT (A) for AY 2001-02. In AY 2006-07 CIT (A) restricted the addition of ₹ 1,91,93,084/- to ₹ 70,69,155/- made by the AO in mechanical manner. As in view of the law laid down by the Hon’ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd. (supra) when the assessee has interest free reserves to the tune of ₹ 35,32,74,483/- and disallowance made by the AO is not proved to be expenses incurred for the purpose of earning dividend income as the entire investment has been made out of interest free funds available with the assessee, no ground is made out to interfere into the findings returned by ld. CIT (A) to that extent.- Decided in favor of assessee. Issues Involved:1. Deletion of disallowance under Section 14A for AY 2001-02.2. Restriction of addition under Section 14A for AY 2006-07.3. Consideration of source of investment for disallowance under Section 14A.4. Applicability of Rule 8D for pre-Rule 8D period.5. Adherence to specific directions from ITAT in earlier orders.Detailed Analysis:1. Deletion of Disallowance under Section 14A for AY 2001-02:The Revenue challenged the deletion of disallowance amounting to Rs. 90,32,506/- made by the AO in the de novo assessment as per the Tribunal's directions. The CIT(A) deleted the disallowance by considering that the assessee had made the investment out of its own free reserves (share capital and reserves & surplus) on which no interest was paid. The Tribunal upheld the CIT(A)'s decision, noting that the assessee's own funds were more than the total investment made for earning exempt income. The Tribunal referenced the Supreme Court's decision in M/s. Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT, affirming that only the expenditure actually incurred to earn exempt income can be disallowed under Section 14A.2. Restriction of Addition under Section 14A for AY 2006-07:The Revenue contested the CIT(A)'s decision to restrict the addition from Rs. 1,91,93,084/- to Rs. 70,69,155/-. The CIT(A) relied on the computation of disallowance submitted by the assessee and considered the free reserves available with the assessee. The Tribunal found that the CIT(A) erred in restricting the addition based on presumption and directed the CIT(A) to re-examine whether the investment to earn dividend income was made from tax-free funds or borrowed funds. The Tribunal allowed the cross-objection for statistical purposes, requiring a fresh decision after providing an opportunity for a hearing.3. Consideration of Source of Investment for Disallowance under Section 14A:The Revenue argued that the source of investment is not relevant for calculating disallowance under Section 14A, even before the insertion of Rule 8D. However, the Tribunal upheld the CIT(A)'s consideration of the source of investment, noting that the assessee had sufficient interest-free funds to cover the investments made for earning exempt income.4. Applicability of Rule 8D for Pre-Rule 8D Period:The Tribunal clarified that Rule 8D is effective from AY 2008-09, and thus, not applicable for the assessment years in question (2001-02 and 2006-07). The Tribunal emphasized that the disallowance under Section 14A should be based on actual expenditure incurred for earning exempt income.5. Adherence to Specific Directions from ITAT in Earlier Orders:The Revenue contended that the CIT(A) erred in traveling beyond the specific directions given by the ITAT in its earlier order. The Tribunal found that the CIT(A) had adhered to the directions by considering the availability of interest-free funds and the actual expenditure incurred for earning exempt income.Conclusion:The Tribunal dismissed the appeals filed by the Revenue for AY 2001-02 and 2006-07, upholding the CIT(A)'s decisions. The cross-objection filed by the assessee for AY 2006-07 was allowed for statistical purposes, requiring a fresh decision on the restricted addition. The Tribunal emphasized the importance of actual expenditure incurred for earning exempt income and the availability of interest-free funds in determining disallowance under Section 14A.