2020 (9) TMI 234 - AT - Income Tax

Tribunal Allows Appeal: Interest Expenditure Upheld, Indirect Expenditure Disallowed

Sargam Retails Private Limited Versus DCIT, Central Circle-6, Pune

Sargam Retails Private Limited Versus DCIT, Central Circle-6, Pune - TMI Issues Involved:1. Disallowance under Section 14A read with Rule 8D of the Income-tax Act, 1961.2. Objective satisfaction not recorded by the Assessing Officer.3. Availability of own funds versus borrowed funds for tax-free investments.4. Disallowance of indirect expenditure.5. Investment in partnership firms and its tax implications.6. Additional ground regarding deduction of education cess and secondary and high education cess.Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D:The main issue in this appeal is the disallowance of Rs. 1,06,67,279/- under Section 14A of the Income-tax Act, 1961, read with Rule 8D of the Income-tax Rules, 1962. The disallowance was made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)].2. Objective Satisfaction Not Recorded by AO:The assessee argued that the AO did not record objective satisfaction to demonstrate that the claim made by the assessee of not incurring any expenditure to earn exempt income was incorrect. The CIT(A) dismissed this argument, stating that the AO followed the provisions of Rule 8D(2)(ii), which mandates disallowance if the assessee fails to prove no interest was incurred for earning exempt income.3. Availability of Own Funds Versus Borrowed Funds:The assessee contended that it had sufficient interest-free funds (Rs. 271.85 crores) to make the investments (Rs. 173.77 crores) that earned tax-free income, relying on the Bombay High Court's decision in CIT Vs. Reliance Utilities & Power Ltd. The Tribunal agreed with the assessee, stating that there was a presumption that the investments were made from the assessee's own funds, not borrowed funds. Therefore, the disallowance of interest expenditure under Section 14A was not sustainable.4. Disallowance of Indirect Expenditure:The AO disallowed Rs. 82,41,026/- under Rule 8D(2)(iii) for indirect expenditure incurred to earn exempt income. The assessee argued that the major exempt income was from the share of profit from partnership firms, which did not require any expenditure. The Tribunal found that common administrative expenses were partly attributable to earning exempt income, including the share of profit from the partnership firm. Therefore, the disallowance of indirect expenditure was justified.5. Investment in Partnership Firms:The assessee argued that investments in partnership firms should be excluded from 'tax-free investments' for computing disallowance under Rule 8D, as the income earned by the firm is subjected to income tax. The Tribunal rejected this argument, stating that the formula in Rule 8D(2)(iii) could not be altered unless found patently untenable.6. Additional Ground: Deduction of Education Cess:The assessee raised an additional ground for the deduction of education cess and secondary and high education cess amounting to Rs. 20,37,889/-. The Tribunal admitted this additional ground and allowed the deduction, following the Bombay High Court's decision in Sesa Goa Ltd. Vs. JCIT, which held that 'cess' is not included in Section 40(a)(ii) and is therefore deductible.Conclusion:The Tribunal partly allowed the appeal, deleting the disallowance of interest expenditure under Section 14A read with Rule 8D(2)(ii) but upheld the disallowance of indirect expenditure under Rule 8D(2)(iii). Additionally, the Tribunal allowed the deduction for education cess and secondary and high education cess.