The Income Tax Appellate Tribunal, Pune Bench, has recently in an appeal filed before it, held that disallowance under rule 8D shall not be warranted when investments are made from own funds.
The aforesaid observation was made by the Tribunal when an appeal was filed before it by the assesseeDevenSupercriticalsPvt. Ltd., as against the order dated 29-06-2017 passed by the Commissioner of Income Tax (Appeals), Pune [CIT(A)], for assessment year 2013-14.
The issue raised in the appeal being the action of the CIT(A) in confirming the disallowance made by the AO under Rule 8D r.w.s. 14A of the Income Tax Act,in the absence of recording of satisfaction by the AO, and alternatively seeking direction to AO to restrict the disallowance under Rule 8D concerning the investments yielded exempt income, the facts of the case were that the assesseehad received a dividend income of Rs.49,73,372, following whichthe assessee on its own disallowed Rs.10,000/- on ad hoc basis.
Subsequently, the AO on an examination of accounts of the assessee,holding the opinion that the assessee did not apportion any expenditure relating to the exempt income and being not satisfied with the claim of assessee that no expenses were incurred to earn its exempt income, proceeded to work out by applying Rule 8D thereby disallowing the expenditure of Rs.1,78,490/- and Rs.5,40,395/- under Rule 8D(ii) & (iii), respectively.
And with the AO clearly recordinghis non-satisfaction with regard to accounts of assessee in para 4 of the assessment order, the CIT(A) also confirmed this view of the AO, leaving the assessee aggrieved to prefer the instant appeal before the Pune ITAT.
Hearing the opposing contentions of both the sides as submitted by Shri Kishor B. Phadke on behalf of the assessee and by Shri M.G. Jasnani on behalf of the Revenue,as well as perusing the materials available on record, S.S. Viswanethra Ravi, the Judicial member of the Pune ITAT commented:
“On perusal of the finding of the AO regarding recording of non-satisfaction with regard to accounts of assessee relating to exempt income, I do not find any infirmity in the order of CIT(A) in holding that the AO recorded its satisfaction vide para 6 of the impugned order. Therefore, the submissions of ld. AR are rejected and ground No. 1 raised by the assessee is dismissed.”
“Admittedly, the assessee has its own funds under Capital and Reserve to an extent of Rs.15.62 crores which is not disputed by the AO nor the CIT(A). Further, there is no dispute with regard to investments made to an extent of Rs.11.40 crores as on 31-03-2014 by the AO and the CIT(A). It clearly establishes that the Capital and Reserve of assessee are more than the investments made under the year under consideration”, he added.
“Therefore, it is to be presumed that the assessee made investments from its own funds but not from borrowed funds. And if that is the case, the disallowance under interest is not warranted. Therefore, disallowance under Rule 8D(ii) to an extent of Rs.1,78,490/- is not maintainable.”, the ITAT observed.
“Hence, the order of CIT(A) is not justified in confirming the disallowance under Rule 8D(2)(ii) on account of interest expenditure and to that extent the order of CIT(A) is set aside. Coming to the disallowance under Rule 8D(2)(iii) to an extent of Rs.5,40,395/-, I note that the ld. AR contended to remand the issue to the file of AO for computation of disallowance concerning the investments which yielded exempt income.”, the ITAT stressed while further adding to its observation.
Thus, finally partly allowing the assessee’s appeal, S.S. Viswanethra Ravi, the Judicial member of the of ITAT concluded:
“I note that the AO did not examine the said disallowance on this aspect and proceeded to disallow at 0.5% on an average value of investments concerning the first day and last day of previous year to an extent of Rs.10,80,79,007/-. It is settled principle to restrict the disallowance to those investments earned dividend income. Therefore, following the same I direct the AO to compute the disallowance taking into consideration those investments which yielded exempt income. The assessee is liberty to file evidence, if any, in this regard.”
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