Disallowance u/s 14A not warranted if assessee was having sufficient own funds at its disposal for the purpose of making investments

Where assessee was having sufficient own funds at its disposal for the purpose of making investments, it could be held that no borrowed funds were utilized for making investments. Hence, there could not be any disallowance of interest under second limb of rule 8D(2) of the rules.

Assessee earned dividend income, which was claimed as exempt under section 10(34). AO invoked the provisions of section 14A and made disallowance of interest under second limb of rule 8D(2) of the rules on the ground the law does not make any distinction for the disallowance under section 14A in a case where dividend was credited to the bank directly.

Held: From the perusal of the balance sheet of the assessee it was found that assessee was having sufficient own funds at its disposal for the purpose of making investments and accordingly it could be held that no borrowed funds were utilized for making investments. Hence, there could not be any disallowance of interest under second limb of rule 8D(2) of the rules.

Decision: In assessee’s favour.

IN THE ITAT, KOLKATA BENCH

S.S. GODARA, JM & M.BALAGANESH, AM

Essel Mining & Industries Ltd. v. DCIT

ITA No. 786/Kol/2013

2 May, 2018

Appellant by: D.S. Damle, FCA

Respondent by: G. Hangshing, CIT

M. Balaganesh, AM

This appeal was earlier disposed off by this tribunal in ITA No. 786 & 2073/Kol/2013 (cross appeals) for the assessment year 2008-09 vide order dated 10-3-2017. Later a Miscellaneous Application was preferred by the assessee in M.A.No. 108/Kol/2017 for non-consideration of the tribunal decision passed in assessee’s own case with regard to the issue of disallowance under section 14A of the Act. This Miscellaneous Application of the assessee was disposed off by this tribunal in M.A.No. 108/Kol/2017 dated 10-11-2017 by holding as under:–

6. In view of the above we hold that the mistake apparent from the record has occurred in the order passed by this Hon’ble ITAT in pursuance to the provisions of section 254(2) of the Act. We therefore recall the impugned order for the limited purpose of adjudication of the disallowance made by the assessing officer under section 14A of the Act. Accordingly the registry is directed to fix the case for hearing in due course of time. Hence the ground filed by the assessee in Miscellaneous Application is allowed.

2. Accordingly, this appeal was refixed for this limited purpose of adjudication on the issue of disallowance under section 14A of the Act and was heard on 26-4-2018.

3. The brief facts of the issue of disallowance under section 14A of the Act are that the assessee is a limited company engaged in the manufacturing business of rising of ore, manufacturing of nitrogen gas and ferro alloys, trading of iron ore and ferro alloys, generation of electricity (wind mill) and railway siding for captive use. The assessee in the year under consideration earned dividend income of Rs. 7.10 crores which was claimed as exempt under section 10(34) of the Act. The learned assessing officer questioned the assessee for invoking the provisions of section 14A of the Act read with rule 8D of the Rules. The assessee replied as under:–

(a) There was no direct expenditure incurred in earning the aforesaid dividend income as the dividend was received in the bank directly.

(b) There was no borrowed fund used in making the investment therefore the question of interest disallowance does not arise.

(c) The assessee for the administrative expenses has made the disallowance of Rs. 5.97 lacs and submitted the details of the same in separate annexure and stated that 4 persons salary has been allocated to this.

However, the learned assessing officer rejected the contention of the assessee by observing that the law does not make any distinction for the disallowance under section 14A of the Act in a case where the dividend was credited to the bank directly. Accordingly the learned assessing officer invoked the provisions of rule 8D and worked the disallowance as under:–

This action was confirmed by the learned Commissioner (Appeals). Aggrieved, the assessee is in appeal before us on the following grounds:–

1. For that on the facts and in the circumstances of the case, the Commissioner (Appeals) erred in upholding the disallowance of Rs. 17,15,98,000 made by the assessing officer under section 14A of the Income Tax Act even though the authorities below had not established any nexus between incurring of the expenses of such magnitude with earning of tax-free income.

2. For that on the facts and in the circumstances of the case, there having been net reduction in the “Investments” during the relevant year from which the tax exempt income was earned and in the years of making investment there being no finding recorded by the assessing officer that the investments were made out of borrowed funds, the authorities below were unjustified in law in disallowing part of the interest paid by invoking provisions of section 14A of the Income Tax Act.

3. For that on the facts and in the circumstances of the case and without prejudice to Ground Nos. 1 & 2 above, the authorities below were unjustified in law in not considering the interest disallowed by the appellant in the computation of total income while invoking provisions of section 14A of the Income Tax Act.

4. We have heard the rival submissions and perused the materials available on record. We find from the perusal of the balance sheet of the assessee that the assessee is having sufficient own funds at its disposal for the purpose of making investments and accordingly it could be held that no borrowed funds were utilized for making investments. We find that this factual issue had already been considered in assessee’s own case by this tribunal in ITA No. 589/Kol/2011 dated 20-5-2016 for the assessment year 2007-08 had categorically held that all the investments were made only out of own funds of the assessee and not out of borrowed funds. Hence there cannot be any disallowance of interest under second limb of rule 8D(2) of the Rules. We find that during the year under appeal, the same old investments were brought forward from earlier years. Moreover, the profits of the assessee for the year also has increased during this year and investments had decreased during the year. We find that this issue is also covered by the decision of the Hon’ble Jurisdictional High Court in the case of Pr.CIT v. Rasoi Ltd. [G.A No. 633 of 2016, ITAT No. 109 of 2016, dt. 15-2-2017]. The Jurisdictional High Court after considering the judgement of the co-ordinate bench in Dhanuka & Sons (2011) 339 ITR 319 (Cal) had observed as under:–

“It appears for both the assessment years the Appellate Authority held that there was no finding of direct nexus between the borrowed fund and investment in shares. The assessee’s own funds were far in excess of the average total investments. There could not be any presumption of utilization of borrowed funds. Hence disallowance under section 14A read with rule 8D(2)(ii) was deleted while disallowance of indirect expenses of Rs. 1,82,346 by application of rule 8D(2)(iii) upheld with the direction to allow relief of the sum already disallowed by the appellant itself.

On appeal preferred by the Revenue the Tribunal held as follows:–

‘We have heard rival submissions and gone through facts and circumstances of the case. We find that now the revenue could not establish that the investments made in shares giving exempted income is out of borrowed funds on which interest is paid by assessee. There is no nexus whatsoever. On specific query learned Sr.DR could not controvert that the assessee has made in investment in shares giving exempt income out of own funds which is at about 2429 lacs and investment is at Rs. 365 lacs only. Once this fact has not been denied and Commissioner (Appeals) has categorically observed that the assessee has made investment in shares out of its own funds no disallowance can be attributed qua the interest paid on borrowed funds for investing the same in interest free funds. In view of the above, we confirm the order of Commissioner (Appeals) on the common issue……..’

We find that this case has yielded concurrent finding of facts regarding expenditure incurred by the assessee for the purpose of earning the exempt income, by the Appellate Authority and the Tribunal. As such there is no scope for interference with such concurrent findings of facts. We, therefore, are not satisfied that the case involves any substantial question of law. The application and appeal are thus dismissed.”

4.1. We find that the own funds of the assessee for various asst years together with the value of investments are as under:–

ASSESSMENT YEARS

Hence the ratio laid down by the Hon’ble Jurisdictional High Court in Rasoi Ltd. (supra) would squarely apply to the facts before us. Respectfully following the same, we hold that no disallowance towards Interest under second limb of rule 8D(2) of the Rules is warranted in the facts of the instant case.

4.2. With regard to disallowance under rule 8D(2)(iii) of the rules, we hold that only investments yielding exempt income should be considered for the purpose of working out disallowance thereon, in consonance with the decision rendered by this tribunal in the case of REI Agro Ltd. (2013) 144 ITD 141 (Kol). Accordingly we direct the learned assessing officer to recompute the disallowance under the third limb of rule 8D(2) of the Rules accordingly. While doing so, he should also reduce the disallowance already made by the assessee in the return of income.

5. Accordingly, the grounds 1 to 3 raised by the assessee are allowed for statistical purposes.

6. In the result, the appeal of the assessee on this limited aspect of disallowance under section 14A of the Act is allowed for statistical purposes.

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