2023 (4) TMI 133 - AT - Income Tax

Appeal partially granted, deletion of interest disallowance under section 14A of Income-tax Act.

Micro Age Instruments Pvt. Ltd. Versus ITO, National e-Assessment Centre, Delhi

The Tribunal partially allowed the appeal, directing the deletion of the addition concerning the disallowance of interest under section 14A of the ... Disallowance u/s 14A r.w.r 8D - As submitted that if the calculation is done in terms of clause (ii) of rule 8D(2), the disallowance would get substantially reduced - HELD THAT:- It is clear from the language of the rule that 1% disallowance is to be made “of the annual average of the monthly averages of opening and closing balances of the value of the investment” and not the average of opening and closing balances on annual basis. We, therefore, set aside the impugned order on this score and remit the matter to the AO for computing 1% disallowance by considering the annual average of the monthly averages of opening and closing balances of the value of investments. Disallowance on account of interest - HELD THAT:- As seen from the assessee”s balance sheet that the investments in securities yielding exempt income has been reflected as “Non Current Investments” amounting to Rs.197.98 crore under the broad head “Non Current Assets”. As against that, the assessee”s balance sheet shows shareholders fund to the tune of Rs.166.20 crore plus “Other long term borrowings – Unsecured” to the extent of Rs.127.50 crore taken from related parties and directors which are non-interest bearing. If we add up the total amount of non interest bearing funds available with the assessee, it clearly emerges that the said amount is far in excess of the amount of investment in exempt income yielding securities to the tune of Rs.197.98 crore. Hon'ble Supreme Court in Godrej & Boyce Manufacturing Co. Ltd [2017 (5) TMI 403 - SUPREME COURT] has held that no disallowance of interest can be made as per rule 8D when interest bearing funds are more than the investments made by the assessee in securities yielding exempt income. Disallowance of interest made by the AO as sustained in the first appeal, cannot be countenanced. We, therefore, order to delete the addition to this extent. Appeal is partly allowed. Issues:1. Disallowance u/s 14A of the Income-tax Act, 1961.Analysis:The judgment pertains to an appeal against the order passed by the CIT(A) in relation to the assessment year 2018-19. The appeal raised four grounds, with the last ground regarding the addition of a specific amount being dismissed as not pressed. The remaining issue concerned the disallowance u/s 14A of the Income-tax Act, amounting to Rs.3,94,25,461. The assessee had claimed exempt income but did not offer any disallowance u/s 14A. The Assessing Officer (AO) computed the disallowance in two parts, which the CIT(A) upheld, leading the matter to the Tribunal.The Tribunal considered the contentions and relevant material on record. The first component of the disallowance was challenged by the assessee, arguing that the calculation method used by the AO led to a higher disallowance. The Tribunal agreed with the assessee's interpretation of the rule and directed the matter back to the AO for recalculation based on the correct method. Regarding the second component of the disallowance, the Tribunal focused on the disallowance of interest amounting to Rs.1,95,62,471. It was noted that this interest was on a loan taken for properties unrelated to the investments generating exempt income. The Tribunal observed that the non-interest bearing funds available with the assessee exceeded the investments in exempt income-yielding securities. Citing a Supreme Court decision, the Tribunal ruled that no disallowance of interest could be made when interest-bearing funds exceeded investments in such securities. Consequently, the disallowance of interest was ordered to be deleted.In conclusion, the Tribunal partially allowed the appeal, directing the deletion of the addition concerning the disallowance of interest. The judgment was pronounced in the Open Court on 16th February 2023.