2022 (1) TMI 140 - AT - Income Tax

Tribunal upholds disallowance under Income Tax Act Section 14A

The Tribunal upheld the disallowance of Rs. 60,30,758 under Section 14A read with Rule 8D of the Income Tax Act, stating that the Assessing Officer ... Addition u/s 14A r.w. Rule 8D(2)(iii) - disallowance at 0.5% of the average amount of tax exempt investments - as submitted that the disallowance made u/s 14A is that of expenditure in relation to income not forming part of total income - whether the AO could tinker with that formula prescribed under Rule 8D(2)(iii) of the I.T. Rules or interpret in any other manner other than what is mentioned by the plain words of the said Rule? - HELD THAT:- This issue came up before in the case of Godrej & Boyce Mfg. Co. Ltd. [2010 (8) TMI 77 - BOMBAY HIGH COURT] wherein constitutional validity of Rule 8D(2)(iii) was challenged. The Court observed that it is only the interest on borrowed funds that will be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt - it is not only the interest directly attributable to tax exempt income i.e., under Rule 8D(2)(i), but also directly relatable to taxable income which has to be excluded from the definition of variable ‘A’ in the formula as per Rule 8D(2)(ii) and rightly so, because it is only then that common interest expenses which are to be allocated as indirectly relatable to taxable income and tax exempt income can be computed. When assessee is paying interest on borrowings and the assessee is not able to show that investment in shares are out of internal accruals or non-interest bearing funds, and in the light in the case of Dhanuka & Sons [2011 (4) TMI 861 - CALCUTTA HIGH COURT] disallowance under section 14 A can indeed be made. Thus, interest expenses directly attributable to tax exempt income is also directly attributable to taxable income are required to be excluded from the computation of common interest expenses to be allocated under Rule 8D(2)(ii). In the present case, wherein the assessee does not offer any disallowance under Rule 8D(2)(ii) in respect of exempt income, then the provisions of section 14A(2) r.w. Rule 8D(2) can be invoked u/s.14A(3) of the Act by the AO and there is no necessity of recording further satisfaction by the AO - when the assessee itself fails to make disallowance suo motu u/s. 14A r.w. Rule 8D, then the AO is at liberty to invoke these provisions. We find no infirmity in the action of the lower authorities on this issue and the same is confirmed. Appeal of the assessee is dismissed. Issues Involved:1. Legality of the disallowance under Section 14A read with Rule 8D of the Income Tax Act.2. Requirement for the Assessing Officer (AO) to examine the books of account and derive satisfaction in the negative.3. Application of Rule 8D(2)(iii) in determining the disallowance.4. Whether investments were made out of own funds or borrowed funds.Issue-wise Detailed Analysis:1. Legality of the Disallowance under Section 14A read with Rule 8D:The assessee challenged the disallowance of Rs. 60,30,758 under Section 14A read with Rule 8D, arguing that these provisions are not automatic and require the AO to conduct an examination of the accounts. The AO must arrive at an objective satisfaction regarding the correctness of the expenditure claimed or the claim that no expenditure has been incurred. The assessee contended that disallowance arises only when actual expenditure is incurred in earning exempt income. The Tribunal noted that the AO applied Section 14A read with Rule 8D(2)(iii) to determine the expenditure related to income not includible in the total income. The Tribunal upheld the AO's application of the formula prescribed under Rule 8D, stating that the AO has no discretionary power to alter the rule.2. Requirement for the AO to Examine the Books of Account and Derive Satisfaction in the Negative:The assessee argued that the AO failed to examine the books of account and derive satisfaction in the negative regarding the claim that no expenditure was incurred towards earning exempt income. The Tribunal acknowledged this argument but emphasized that the AO followed the prescribed method under Rule 8D(2)(iii), which does not require further satisfaction if the assessee has not made any disallowance suo motu under Section 14A.3. Application of Rule 8D(2)(iii) in Determining the Disallowance:The Tribunal discussed the provisions of Rule 8D(2)(iii), which deals with situations where the assessee has incurred expenditure by way of interest not directly attributable to any particular income or receipt. The Tribunal highlighted that the AO must apply the formula prescribed under Rule 8D for computing the expenditure incurred in earning exempt income. The Tribunal referred to the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v. DCIT, which upheld the constitutional validity of Rule 8D(2)(iii). The Tribunal concluded that the AO correctly applied the formula and that the authorities have no discretionary power to modify it.4. Whether Investments were Made out of Own Funds or Borrowed Funds:The assessee claimed that the investments were made out of its own funds, and therefore, the question of disallowance under Section 14A does not arise. The Tribunal referred to various judicial decisions, including CIT v. Winsome Textile Industries Ltd. and CIT v. Suzlon Energy Ltd., which held that if investments are made out of own funds, disallowance under Section 14A cannot be made. However, the Tribunal emphasized that the assessee must provide evidence to show that the investments were made from own funds and not borrowed funds. In the absence of such evidence, the AO's disallowance stands justified.Conclusion:The Tribunal dismissed the appeal, concluding that the AO correctly applied Section 14A read with Rule 8D(2)(iii) and that the assessee failed to provide sufficient evidence to support its claims. The Tribunal upheld the disallowance of Rs. 60,30,758 and confirmed the orders of the lower authorities.