2017 (11) TMI 1235 - AT - Income Tax

Tribunal remits case for fresh assessment under Section 14A: assess interest-free funds & expenses. Assessee's rights upheld.

The Tribunal allowed the appeals for statistical purposes, remitting the matter back to the AO for a fresh assessment. The AO was directed to reconsider ... Disallowance u/s 14A r.w. Rule 8D - Held that:- We find ourselves in agreement with the proposition that if sufficient interest-free funds are available for making the investment in exempt income, disallowance u/s 14A is not justified. See CIT v. Reliance Utility & Power Limited (2009 (1) TMI 4 - BOMBAY HIGH COURT ) Furthermore, the assessee’s plea that assessee has not actually incurred any expenditure in earning the said exempt income also needs consideration in view of the Hon’ble Apex Court decision in the case of Godrej & Boyce Mfg. Co. v. DCIT (2017 (5) TMI 403 - SUPREME COURT OF INDIA ) In view of the aforesaid discussion, in our considered opinion, the issue is to be remitted to the file of the Assessing Officer to consider the issue afresh keeping in mind the discussion hereinabove and the case laws referred above. Needless to add, the assessee should be granted adequate opportunity of being heard. - Decided in favour of assessee for statistical purposes. Issues Involved:1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962.2. Levy of Interest under Section 234C of the Income Tax Act.3. General grounds for appeal.Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962:The primary issue in both assessment years 2010-2011 and 2011-2012 concerns the disallowance of expenditure under Section 14A of the Income Tax Act, which pertains to expenses incurred for earning exempt income. The assessee contested the disallowance of Rs. 7,98,323 and Rs. 8,55,676 respectively, arguing that no expenditure was incurred for earning the exempt dividend income. The Assessing Officer (AO) applied Rule 8D to compute the disallowance, which was upheld by the Commissioner of Income-tax (Appeals) [CIT(A)].The CIT(A) reasoned that since the assessee did not disallow any expenditure suo moto, the AO was justified in applying Rule 8D. The CIT(A) referenced the Bombay High Court judgment in the case of Godrej & Boyce Mfg. Co. Ltd., which validated the application of Rule 8D from assessment year 2008-09 onwards. The CIT(A) dismissed the assessee’s argument that no expenditure was incurred and rejected the claim to capitalize the disallowed amount as part of the cost of investments.Upon appeal, the Tribunal noted the assessee's reliance on several precedents, including the Tribunal’s own decisions in the assessee’s earlier assessment years, which held that no expenses were incurred for making tax-free investments. The Tribunal also acknowledged the assessee’s claim of having sufficient interest-free funds to make the investments. The Tribunal agreed with the assessee’s contention that if sufficient interest-free funds are available, disallowance under Section 14A is not justified. This view was supported by the jurisdictional High Court decisions in CIT v. Reliance Utility & Power Limited and CIT v. HDFC Bank.The Tribunal further considered the Supreme Court’s ruling in Godrej & Boyce Mfg. Co. v. DCIT, which emphasized that disallowance under Section 14A requires proof that expenditure was actually incurred. Consequently, the Tribunal remitted the issue back to the AO for fresh consideration, directing the AO to take into account the availability of interest-free funds and the actual incurrence of expenses.2. Levy of Interest under Section 234C of the Income Tax Act:The assessee contested the levy of interest under Section 234C, which pertains to interest for deferment of advance tax. The Tribunal did not provide a detailed discussion on this issue, as the primary focus was on the disallowance under Section 14A. However, since the matter was remitted to the AO for fresh consideration, the issue of interest levy would also be reconsidered in light of the revised findings on the disallowance.3. General Grounds for Appeal:The assessee reserved the right to add, alter, or amend the grounds of appeal, which is a standard practice to ensure all potential issues can be addressed during the appellate proceedings. This ground did not require specific adjudication by the Tribunal.Conclusion:The Tribunal allowed the appeals for statistical purposes, remitting the matter back to the AO for a fresh assessment. The AO was directed to reconsider the disallowance under Section 14A, taking into account the availability of interest-free funds and the actual incurrence of expenses, in line with the cited judicial precedents. The assessee was to be given an adequate opportunity to present its case during the reassessment process.