2023 (12) TMI 35 - HC - Income Tax

Assessee wins on Section 14A Rule 8D disallowance with sufficient interest-free funds covering investments

The Delhi HC upheld the Tribunal's decision favoring the assessee on disallowance under Section 14A read with Rule 8D. The court found the Tribunal's ... Disallowance u/s 14A r.w.r. 8D - administrative expenses that would possibly have been incurred to earn exempt income - Tribunal ruled in favour of the respondent/assessee, and thus, deleted the entire addition made by the AO as assessee had sufficient interest-free funds available with it to make investments in the AY in issue - HELD THAT:- Reasons given by the Tribunal in deleting the disallowance are unimpeachable. The facts, as noted above, are not in dispute. Concededly, the interest-free funds available to the respondent/assessee were more than the investments made in the AY in issue. Furthermore, as noted by the Tribunal, the AO had not recorded his dissatisfaction [having regard the accounts of the respondent/assessee] before discarding the suo motu disallowance made by the respondent/assessee and triggering disallowance qua the respondent/assessee. This issue is no longer res integra insofar as this court is concerned. [See Coforge Ltd. case [2021 (7) TMI 346 - DELHI HIGH COURT]] Deletion of Non-refundable golf club membership fee - Before concluding, we may also note that the record shows that a coordinate bench of this court [2019 (1) TMI 602 - DELHI HIGH COURT], had ruled that insofar as the deletion on account of non-refundable golf club membership fee, was concerned, the said issue was covered against the appellant/revenue by the decision [2012 (3) TMI 617 - DELHI HIGH COURT], in the case concerning DLF Commercial Ltd. The court also noted that the Special Leave Petition (SLP) [2013 (3) TMI 792 - SC ORDER] filed against the said decision had been dismissed. Issues Involved:1. Whether the Tribunal erred in deleting the disallowance made by the AO under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962.2. Whether the AO failed to record dissatisfaction regarding the correctness of the respondent/assessee's computation under Section 14A.3. Whether the interest-free funds available to the respondent/assessee were sufficient to make the investments in question.4. The relevance of the deletion of non-refundable golf club membership fees.Issue 1: Tribunal's Deletion of Disallowance under Section 14AThe appellant/revenue challenged the Tribunal's order, which deleted the disallowance of Rs. 80,66,72,112/- made by the AO under Section 14A read with Rule 8D. The AO had disallowed Rs. 6,946.01 lakhs towards interest expenditure and Rs. 1,128.93 lakhs as administrative expenses. The CIT(A) deleted the disallowance under Rule 8D(2)(ii) but retained the disallowance under Rule 8D(2)(iii). The Tribunal, however, deleted the entire addition, citing that the AO did not dispute the interest-free funds claim, failed to record dissatisfaction with the respondent/assessee's computation, and did not provide reasons for the disallowance.Issue 2: AO's Failure to Record DissatisfactionThe Tribunal noted that the AO had not recorded any dissatisfaction regarding the correctness of the respondent/assessee's computation under Section 14A. The Tribunal relied on the judgment of the Supreme Court in Godrej & Boyce Manufacture Company Ltd. v. DCIT and the Delhi High Court in HT Media Limited v. Pr. CIT to conclude that the AO's failure to record dissatisfaction invalidated the disallowance.Issue 3: Sufficiency of Interest-Free FundsThe Tribunal found that the respondent/assessee had sufficient interest-free funds to make the investments in question. This conclusion was supported by the Bombay High Court's judgment in CIT-2, Mumbai v. HDFC Bank Ltd. The Tribunal also noted that a substantial part of the exempt dividend income was from investments made in the preceding period, indicating no substantial expenses were incurred to earn the exempt income.Issue 4: Deletion of Non-Refundable Golf Club Membership FeesThe court noted that a coordinate bench had previously ruled that the deletion of Rs. 3,46,46,421/- on account of non-refundable golf club membership fees was covered against the appellant/revenue. The Special Leave Petition (SLP) filed against this decision had been dismissed.ConclusionThe High Court found the Tribunal's reasons for deleting the disallowance unimpeachable. The AO had not recorded his dissatisfaction with the respondent/assessee's accounts before making the disallowance, and the interest-free funds available were more than the investments made. Consequently, no substantial question of law arose for consideration, and the appeal was closed.