2022 (3) TMI 25 - AT - Income Tax

ITAT allows appeal, overturns interest disallowance, directs reassessment of administrative expenses under Rule 8D(2)(iii).

Shri Bajrang Alloys Limited Versus The Deputy Commissioner of Income Tax 1 (2), Raipur.

Shri Bajrang Alloys Limited Versus The Deputy Commissioner of Income Tax 1 (2), Raipur. - TMI Issues Involved:1. Disallowance of Rs. 9,64,389/- on account of inadmissible expenses under Section 14A read with Rule 8D.2. Disallowance of Rs. 1,00,000/- out of Traveling & Conveyance expenses (not pressed by the assessee).Detailed Analysis:Issue 1: Disallowance of Rs. 9,64,389/- on account of inadmissible expenses under Section 14A read with Rule 8DThe assessee filed its return of income for the assessment year 2012-13, declaring a total income of Rs. 2,80,47,160/-. During the scrutiny assessment, the Assessing Officer (A.O) observed that the assessee had invested Rs. 1,50,10,109/- in shares of various companies. The A.O questioned the assessee on the expenditure incurred for earning exempt income and proposed a disallowance under Section 14A of the Income-tax Act, 1961, invoking Rule 8D of the Income Tax Rules, 1962. The assessee contended that no disallowance was warranted as the investments were made from self-owned/interest-free funds. However, the A.O was not convinced and made a disallowance of Rs. 9,64,389/-.On appeal, the CIT (Appeals) upheld the A.O's disallowance, noting that the assessee failed to provide its balance sheet to substantiate the claim that investments were made from self-owned funds.Before the ITAT, the assessee argued that it had sufficient self-owned/interest-free funds amounting to Rs. 23,78,16,054/- (share capital and reserves) against the investment of Rs. 1,50,10,109/- in exempt income yielding shares. The assessee relied on the Supreme Court judgment in the case of South Indian Bank Limited Vs. CIT, which held that if interest-free funds are sufficient to cover the investments, it should be presumed that investments were made from such funds. The ITAT found merit in the assessee's contention, noting that the assessee had sufficient self-owned/interest-free funds and thus, no part of the interest expenditure was liable to be disallowed under Section 14A read with Rule 8D(2)(ii).Regarding the disallowance of administrative expenses under Rule 8D(2)(iii), the ITAT held that only those investments which yielded exempt income during the year should be considered for computing the 'average value of investments.' This view was supported by the Special Bench of the ITAT, Delhi in the case of ACIT Vs. Vireet Investment Pvt. Ltd. Consequently, the ITAT directed the A.O to rework the disallowance of administrative expenses accordingly.Issue 2: Disallowance of Rs. 1,00,000/- out of Traveling & Conveyance expensesThe assessee did not press this ground of appeal. Accordingly, the ITAT dismissed this ground as not pressed.Conclusion:The ITAT allowed the appeal of the assessee in part, vacating the disallowance of interest expenditure under Section 14A read with Rule 8D(2)(ii) and directing the A.O to rework the disallowance of administrative expenses under Rule 8D(2)(iii) by considering only those investments that yielded exempt income during the year. The appeal was allowed in terms of these observations.