2020 (12) TMI 1142 - AT - Income Tax

Tribunal reverses disallowance under I.T.Rules, citing excess interest-free funds over investments with no borrowed funds.

The Tribunal deleted the disallowance of Rs. 66,813 under section 14A r.w.r. 8D(2)(ii) of the I.T.Rules, as the interest-free funds exceeded investments, ... Disallowance u/s 14A r.w.r. 8D(2)(ii) - HELD THAT:- On perusal of the financials of the assessee, which is enclosed in the paper book filed by the assessee, it is clear that the interest free funds in possession of the assessee far exceeded the investments made during the current year and even in the immediately preceding assessment year. For the year ending 31.03.2016, the assessee’s share capital, reserves and surplus together is ₹ 33,70,22,076, whereas, the current year’s investment is only ₹ 11,07,43,921. The only justification of the CIT(A) was that the investments are from a common pool, and therefore, a portion of the interest disallowance is warranted. Hon’ble jurisdictional High Court in the case of CIT v. Microlabs Ltd [2016 (4) TMI 219 - KARNATAKA HIGH COURT] had held that even in a situation where investments are from common pool, if non-interest bearing funds are more than the investments in tax free securities, no disallowance can be made u/s 14A of the I.T.Act r.w.r. 8D(2)(ii) - we delete the disallowance made by the A.O. u/s. 14A of the I.T.Act r.w.r 8D(2)(ii) - we delete the disallowance made by the A.O. u/s. 14A of the I.T.Act r.w.r 8D(2)(ii) of the I.T.Rules - Decided in favour of assessee. Issues Involved:- Disallowance under section 14A r.w.r. 8D(2)(ii) of the I.T.RulesDetailed Analysis:1. Issue of Disallowance under Section 14A r.w.r. 8D(2)(ii) of the I.T.Rules:- The appeal was against the CIT(A)'s order confirming the Assessing Officer's further disallowance of Rs. 66,813 under section 14A r.w.r. 8D(2)(ii) of the I.T.Rules, despite the assessee already disallowing Rs. 2,88,457 under section 14A of the I.T.Act.- The assessee, a company engaged in consultancy services and stock trading, had made investments in equity shares and mutual funds. The return of income for the assessment year 2016-2017 declared total income of Rs. 34,99,00,649, with investments amounting to Rs. 11,07,43,921.- The Assessing Officer made the additional disallowance based on the contention that no borrowed funds were utilized for investments, and the assessee had enough interest-free funds to cover investments.- The CIT(A) upheld the disallowance, stating that the assessee did not maintain separate books of account and the outflow was from a common pool, justifying the interest disallowance under Rule 8D(2)(ii) r.w.s. 14A of the I.T.Act.- The Tribunal noted that the interest-free funds far exceeded the investments, citing a jurisdictional High Court case where it was held that if non-interest bearing funds exceed investments in tax-free securities, no disallowance can be made under section 14A r.w.r. 8D(2)(ii) of the I.T.Rules.- Relying on judgments from the jurisdictional and Bombay High Courts, the Tribunal deleted the disallowance of Rs. 66,813, as the ratio applied to the facts of the case.This detailed analysis covers the issues involved in the legal judgment, focusing on the disallowance under section 14A r.w.r. 8D(2)(ii) of the I.T.Rules and the subsequent decisions by the CIT(A) and the Tribunal based on the facts and legal precedents cited in the case.