2021 (10) TMI 745 - AT - Income Tax

Tribunal limits disallowance under Income Tax Act, emphasizes direct link in investment.

The Guruharsahai Primary Co-Operative Agricultural Development Bank Ltd. Versus Dy. CIT Circle-3, Ferozpur.

The Tribunal upheld the CIT(A)'s decision to restrict the disallowance under section 14A of the Income Tax Act to the extent of exempt dividend income, ... Disallowance u/s 14A r.w.r. 8D - CIT(A) has restricted the disallowance u/s 14A to exempt income of dividend - basic contention of the assessee that although it is entitled to the deduction u/s 80P(2)(a)(i) for whole of the income earned from providing credit facilities to its members out of surplus funds is accepted by the ld. CIT(A) as the provisions of section 14A apply only to the dividend income which is exempt and not to the interest received on FDR and other investments - HELD THAT:- The allegation of the assessee that the Assessing Officer has denied deduction u/s 80P of Income Tax Act, is factually wrong and therefore there could be no grievance of the appellant in respect of claim of deduction u/s 80P. The only disallowance calculated by the Assessing Officer is by applying section 14A read with Rule 8D pertain to dividend income only. No disallowance can be made in view in the case of CIT, Jalandhar-1, Jalandhar vs. Max India Ltd [2017 (3) TMI 1254 - PUNJAB AND HARYANA HIGH COURT] where it was held that where an assessee has sufficient interest-free funds to earn exempt income no disallowance can be made under section 14A - No such effort has been made to place on record either before the Ld. CIT(A) nor before us, as to when was the investment made, what was the amount of investment made and what were the interest-free sources. In our view, mere argument that the Balance sheet for the year ending March 2015 contained paid-up share capital and reserve fund which were interest-free source is not sufficient to establish the links of the source of investment with the interest-free sources. Unless and until, the appellant organically links the source of investment with the interest-free sources, the benefit of the aforesaid decision cannot be extended. Following the case of Punjab Tractors Ltd [2017 (2) TMI 647 - PUNJAB AND HARYANA HIGH COURT] held that the presumption of using interest free funds would arise only if the assessee shows availability of funds. The case law relied upon by the assessee are distinguished on the peculiar facts of the instant case. In the case of Maxopp Investment Ltd. [2018 (3) TMI 805 - SUPREME COURT] it has been approved that the disallowance cannot be more than total exempt income. Respectfully following the Hon’ble Apex Court, the ld. CIT(A) was justified in restricting the disallowance u/s 14A equivalent to exempt income of dividend to the extent of ₹ 5,06,792/- No merit and substance in the contentions of the appellant. Issues:Confirmation of disallowance under section 14A of the Income Tax Act.Analysis:The judgment pertains to an appeal against an order passed by the CIT(A), Bathinda, concerning the disallowance made by the Assessing Officer under section 14A of the IT Act. The primary issue revolves around the confirmation of the disallowance of Rs. 5,06,792 out of the total disallowance of Rs. 53,77,505. The appellant contested the disallowance and raised grounds challenging the application of section 14A and the denial of enhanced deduction under section 80P of the Act.The assessee, a Primary Co-operative Agricultural Development Bank Ltd., declared nil income after claiming deduction under section 80P. However, the Assessing Officer invoked section 14A read with Rule 8D to make a disallowance of Rs. 53,77,505 pertaining to dividend income. The CIT(A) restricted the disallowance to the extent of exempt dividend income, amounting to Rs. 5,06,792. The appellant argued for legitimate deduction under section 80P for income from providing credit facilities to members.The CIT(A) acknowledged the appellant's entitlement to deduction under section 80P and clarified that section 14A applies only to exempt dividend income, not to interest received on investments. The appellant's contention that sufficient interest-free funds negate disallowance under section 14A was dismissed as the appellant failed to establish a direct link between investments and interest-free sources. Citing relevant case law, the CIT(A) justified restricting the disallowance to the exempt dividend income.Ultimately, the Tribunal upheld the CIT(A)'s order, emphasizing that the disallowance under section 14A was correctly restricted to the extent of exempt dividend income. The judgment highlighted the necessity for a clear nexus between investments and interest-free sources to avoid disallowance under section 14A. The appellant's arguments were deemed unsubstantiated, leading to the dismissal of the appeal.In conclusion, the Tribunal affirmed the CIT(A)'s reasoned order, concluding that no merit existed in the appellant's contentions. The judgment underscores the importance of establishing a direct correlation between investments and interest-free funds to avoid disallowance under section 14A, ultimately upholding the decision to restrict the disallowance to the exempt dividend income.