2018 (4) TMI 128 - AT - Income Tax

Appeal allowed, disallowance under Section 14A vacated. Interest payment not linked to tax-exempt income. CIT(A)'s findings upheld.

M/s. M.C. Davar Holdings Pvt. Ltd. Versus Dy. CIT, Circle – 2 (1) (2), Baroda

M/s. M.C. Davar Holdings Pvt. Ltd. Versus Dy. CIT, Circle – 2 (1) (2), Baroda - TMI Issues Involved:1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961.Issue-wise Detailed Analysis:Disallowance under Section 14A read with Rule 8D:The core issue in this appeal pertains to the disallowance of Rs. 3,80,764 under Section 14A read with Rule 8D, in addition to the disallowance of Rs. 13,22,660 already made by the appellant. The CIT(A) upheld the Assessing Officer’s (AO) action, noting that the appellant did not maintain a separate set of accounts for investments and earning of exempted income. The appellant argued that certain strategic investments amounting to Rs. 1,08,24,270 should be excluded from the average value of investments while computing the disallowance, and that these investments were made out of own funds. However, the CIT(A) found no direct nexus between the investments and non-interest bearing funds and rejected the appellant's argument, stating that under Section 14A read with Rule 8D, no exception is provided for exclusion of strategic investments.The appellant further contended that the interest-free funds available were far in excess of the investments yielding tax-exempt income, and these investments were carried forward from an earlier point of time before the related borrowings were resorted to. This was supported by a coordinate bench's order in the appellant's own case for the preceding assessment year 2010-11, where it was held that if interest-free funds are far in excess of the investments yielding tax-exempt income, a presumption is to be taken that the investments were made out of interest-free funds. This position is supported by the Hon'ble Bombay High Court's decision in the case of CIT Vs Reliance Utilities & Power Ltd, and various orders passed by coordinate benches of the Tribunal.The Tribunal observed that, in such a situation, no part of the interest payment can be attributed to the investments yielding tax-exempt income, and thus, no interest expenses can be disallowed under Rule 8D. This proposition is supported by the decision of a coordinate bench in the case of ACIT Vs Champion Commercial Co Ltd, which was approved by the Hon'ble Delhi High Court in the case of PCIT Vs Bharti Overseas Limited.The Tribunal noted that the factual elements embedded in the appellant's contentions were not disputed by the Revenue. Therefore, the Tribunal vacated the impugned disallowance of Rs. 7,23,166, concluding that the disallowance offered by the appellant was more than adequate.In conclusion, the Tribunal adopted judicial consistency and affirmed the CIT(A)’s findings under challenge, allowing the assessee’s appeal.Conclusion:The appeal was allowed, and the disallowance of Rs. 3,80,764 under Section 14A read with Rule 8D was vacated, following the precedent set by a coordinate bench in the appellant's own case for the preceding assessment year. The Tribunal upheld that no part of the interest payment could be attributed to the investments yielding tax-exempt income, given that the interest-free funds were far in excess of such investments.