No disallowance u/s 14A can be made if assessee had sufficient interest free own funds
The Income Tax Appellate Tribunal (ITAT Delhi) in its order dated 19.04.2022 in case of M/s Clix Finance India Pvt. Ltd. sustained that interest expenditure can not be disallowed u/s 14A of the Income Tax Act, 1961 (The Act), where assessee had interest free funds which exceeds the investment in tax free fund security.
In this matter, the assessee company is engaged in the business of providing finance to industry, trade, etc. through hire purchase, lease and loans. It has been registered as Non Banking Financial Company registered with the Reserve Bank of India. The ld. Assessing Officer noted that assessee had earned dividend income of Rs.2,22,48,998/- and had disclosed investment of Rs.63,66,00,000/- in shares as on 31.03.2014 and issued show cause notice to the assessee. In response to the show cause notice the assessee had filed detailed submissions, in sum and substance it was stated that, firstly, the dividend income had been earned by the investment made in the company which has been held for various years; secondly, assessee had also invested in mutual funds which were taxable; thirdly, all the investments had been made by the assessee out of its own funds and not borrowed funds, as own funds far exceeded the total investment to the tune of Rs.556.07 crores as against the exempt income generating investments of Rs.63.66 crores; and lastly, the assessee had itself worked out the disallowance to the amount of Rs.31,83,042/- being 0.5% of the average value of investment in view of Rule 8D(2)(iii) of the Act. However, the ld. Assessing officer simply observed the assessee’s claim that it had not incurred any expenses is not acceptable. Thereafter, Assessing Officer has computed the disallowance of Rs.3,24,31,758/- which constituted disallowance under Rule 8D in so far as the disallowance under Rule 8D(2)(iii) being 0.5% of the average value of investment is not in dispute. The ld. CIT (Appeals) had restricted the disallowance under Section 14A of the Act to the extent of exempt income earned, i.e., Rs.2,22,48,998/- Aggrieved with the above order passed by CIT(A) assessee preferred appeal before ITAT.
Before ITAT ld. Counsel submitted that, firstly, this issue stands covered by the decision of ITAT in assessee’s own case for the assessment year 2008-09 wherein on similar facts and finding the Tribunal had deleted the disallowance of interest on the ground that assessee had huge surplus interest free funds. Secondly, nowhere the Assessing Officer has recorded any satisfaction that why the disallowance offered by the assessee is not correct. In support, he relied upon the judgement of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 15 SSC 523 and Godrej & Boyce Mfg. Co. Ltd. Vs. CIT (2017) 7 SCC 421. ITAT was of the view that Nowhere the Assessing Officer has made any observation on these submissions that no interest can be disallowed or recorded his satisfaction as to why the claim of the assessee is not tenable having regard to the books of accounts and the nature of expenditure debited to the profit and loss account. He has mechanically proceeded to make the disallowance under Section 14A of the Act, without rebutting to assessee’s specific claim made before him.
ITAT also relied on the judgment of Hon’ble Supreme Court in the case of South Indian Bank vs. CIT, 438 ITR 1, wherein it has been held that where assessee had interest free funds available which exceeds the investment made in tax free fund security then no interest expenditure can be disallowed and it has to be presumed that it is out of assessee’s own fund and proportionate disallowance could not warrant under section 14A even where no separate accounts were maintained by the assessee and other expenditure made for earning tax free income. Hon’ble Supreme Court clearly held that if assessee had mixed funds, made up partly of interest free funds and partly of interest-bearing funds and payment has been made out of mixed funds, then the investment must be considered to have been made out of interest free funds. It is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it would be not permissible for the Revenue to make an estimation of a proportionate figure. Disallowance could be legally impermissible for the investment made by the assessee in bonds/shares using interest free funds under Section 14A. Thus proportionate disallowance of interest is not warranted under section 14A for investments made in tax-free bonds/ securities which yielded tax free dividend and interest to assessee banks where interest free funds are available exceeded their investments. Thus, no disallowance on account of section 14A can be made. Accordingly, the disallowance as made by the Assessing Officer under Rule 8D(2)(iii) is deleted.
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