2025 (10) TMI 653 - AT - Income Tax

S.14A r/w Rule 8D: Interest disallowance deleted; administrative expense disallowance to be recomputed using average exempt-income investments

ITAT upheld that the AO's suo moto disallowance under s.14A r/w Rule 8D warranted adjustment: the assessee's earlier self-computation was incorrect but ... Addition u/s 14A read with Rule 8D - AO did not record dis-satisfaction with suo moto disallowance made u/s 14A - HELD THAT:- AO in the assessment order had reproduced the submission made by the assessee in this respect and, thereafter, recorded the fact that the explanation of the assessee was not acceptable for the reason that the Department had filed SLP against the decision of Hon’ble Gujarat High Court, which was pending before the Hon’ble Supreme Court on the same issue. AO after rejecting the working of expenses as made by the assessee, had reworked the disallowance u/s 14A r/w Rule 8D of the Income Tax Rules. Assessee had also made a submission before the CIT(A) that the disallowance u/s 14A read with Rule 8D of the Income Tax Rules may be restricted to Rs. 2,25,90,143/-. This admission of the assessee establishes that the disallowance of Rs. 20,72,918/- under Section 14A of the Act as made by the assessee in the return of income, was not correct. Disallowance of interest expense u/s 14A read with Rule 8D - contention of the assessee is that the own funds available with the assessee was far in excess than the strategic investment made in six companies - HELD THAT:- The own funds available with the assessee was in much excess than the investments made by the assessee. AO had also not given any finding that any interest-bearing fund was utilised for making these investments and the disallowance was based on mere presumption. Disallowance in respect of interest expenditure cannot be sustained. Respectfully following the judgement of Hon’ble Supreme Court and the decision of this Tribunal in the assessee’s own case in the earlier years, the addition in respect of interest expense is deleted. Disallowance of administrative expenses - We direct the Assessing Officer to work out the disallowance in respect of administrative expense on the basis of average value of investment, by taking into account only those investments which have yielded exempt income during the current assessment year. The ground taken by the assessee is partly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer's invocation of Rule 8D read with Section 14A is permissible where the assessee made a suo-moto disallowance but the Assessing Officer is dissatisfied with the correctness of that computation. 2. Whether disallowance under Section 14A read with Rule 8D in respect of interest expense is warranted where the assessee's own (interest-free) funds at the beginning of the year exceed the investments yielding exempt income. 3. Whether the base for computing administrative expense disallowance under Rule 8D(2)(ii) should include only those investments that actually yielded exempt (dividend) income in the relevant year, or all investments held. 4. Whether the appellate order under Section 250 is vitiated for being non-speaking or for denial of opportunity (video conferencing) - i.e., whether principles of natural justice or requirement of reasons were breached by the CIT(A). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of AO invoking Rule 8D despite assessee's suo-moto disallowance Legal framework: Section 14A disallows expenditure incurred in relation to exempt income; Rule 8D prescribes a methodology for computing such disallowance where no correct disallowance has been made. Section 14A(2) contemplates AO's dissatisfaction with assessee's own computation as a trigger for AO to apply Rule 8D. Precedent treatment: The Court refers to the concept that AO may rework a suo-moto disallowance if not satisfied with the assessee's computation; prior decisions of the Tribunal and High Courts (and the Supreme Court in related contexts) are applied to test correctness. Interpretation and reasoning: The Tribunal examined the assessment record and found the AO had reproduced the assessee's submission and recorded specific reasons for rejecting it (reliance on pending or earlier Supreme Court/Supreme Court-related litigation assertions and other factual discrepancies). The assessee itself made an alternative admission before the CIT(A) seeking restriction to a higher figure than the initial suo-moto amount, which the Tribunal treated as implicit recognition that the initial suo-moto disallowance was incorrect. Ratio vs. Obiter: Ratio - where the AO records reasons for dissatisfaction with a suo-moto disallowance and the assessee's own continued submissions indicate the original calculation was not correct, AO may lawfully apply Rule 8D to rework the disallowance. Obiter - observations about specific factual assertions regarding SLP/pendency were addressed as facts of the record. Conclusion: The ground challenging AO's invocation of Rule 8D on the basis that the AO did not record dissatisfaction is dismissed; AO's reworking under Rule 8D was found permissible on the record. Issue 2 - Disallowance of interest expense under Section 14A/Rule 8D where own funds exceed investments Legal framework: Rule 8D provides formulae for disallowance including apportionment of interest where borrowed funds are involved; judicial principle recognizes that if own (interest-free) funds exceed the investments, investments are presumed financed from own funds and proportionate disallowance of interest is not warranted. Precedent treatment: The Tribunal relied on binding higher court authority holding that surplus own funds negate the presumption that investments were financed by borrowings; Tribunal also relied on its own coordinate-bench decisions in earlier assessment years of the same assessee applying the same reasoning. Interpretation and reasoning: The Tribunal compared the assessee's opening own funds and investment levels and found own funds substantially exceeded the investments. There was no finding by the AO that any interest-bearing funds were specifically employed for these investments; disallowance was therefore based on mere presumption. The Tribunal applied the Supreme Court principle that where sufficient own funds exist, investments are presumed to be out of own funds and interest disallowance cannot be sustained. Ratio vs. Obiter: Ratio - where own funds materially exceed the investment, and absent findings that interest-bearing funds were used for the investment, disallowance of interest under Section 14A/Rule 8D must be deleted. Obiter - references to analogous factual matrices in earlier years of the same assessee support the outcome but are ancillary. Conclusion: The addition relating to interest expense (Rs. 9.04 crores approx. in the judgment) is deleted; disallowance cannot be sustained on the facts. Issue 3 - Scope of 'investment' for computing administrative expense disallowance under Rule 8D Legal framework: Rule 8D(2)(ii) prescribes disallowance of certain expenditure (administrative) as 0.5% of average value of investments for computing Section 14A disallowance. The question is which investments form the denominator for that computation. Precedent treatment: The Tribunal relied on judicial authorities (including a High Court decision and earlier coordinate-bench decisions involving the same assessee) holding that only investments yielding exempt income in the relevant year should be included in computing average investment for the purpose of this disallowance. Interpretation and reasoning: On facts, the assessee received dividend from only two of six invested companies; the Tribunal held that including investments from which no exempt income was earned would improperly inflate the base and produce an excessive disallowance. The Tribunal directed the AO to recompute administrative expense disallowance using only those investments that yielded exempt income in the relevant year. Ratio vs. Obiter: Ratio - for Rule 8D(2)(ii) administrative-expense computation, only investments that yielded exempt income during the relevant year are to be considered in the average investment denominator. Obiter - citations to analogous authority reinforce the correctness but do not change the legal test. Conclusion: The ground is partly allowed; AO directed to recompute administrative expense disallowance based on investments that actually yielded exempt income in the assessment year. Issue 4 - Alleged non-speaking appellate order and denial of opportunity (video conferencing) Legal framework: Principles of natural justice require reasons and opportunity to be heard; appellate authorities must consider written submissions and furnish reasons for non-acceptance. Precedent treatment: The Tribunal examined the record of proceedings before the CIT(A) and the material placed by the parties; prior jurisprudence on what constitutes a speaking order and minimum requirement for opportunity was applied by reference to facts. Interpretation and reasoning: The Tribunal found that the CIT(A) had reproduced and considered submissions, that the appeal was decided on merits on the material before the authority, and that specific contentions were addressed in the assessment and appellate records. The Tribunal did not find a breach of natural justice or failure to provide opportunity by the appellate authority based on the record presented. Ratio vs. Obiter: Ratio - an appellate order will not be set aside as non-speaking where the record shows the authority considered the relevant submissions and reached conclusions on contested points; mere allegation of lack of video conferencing opportunity absent record of prejudice is insufficient. Obiter - procedural preferences (e.g., mode of hearing) noted but not determinative here. Conclusion: Grounds alleging non-speaking order and denial of hearing opportunity are dismissed; no vitiation of the CIT(A)'s order was found on these bases. Overall Disposition The appeal is partly allowed: interest disallowance under Section 14A/Rule 8D is deleted; administrative-expense disallowance is to be recomputed limiting the investment base to those yielding exempt income; other grounds, including validity of AO invoking Rule 8D and procedural complaints about the CIT(A), are dismissed. The Tribunal's directions are confined to remand for recomputation where indicated.