Excessive Suo-Motu Disallowance u/s 14A Restricted: ITAT Grants Relief to Hero Cycles Ltd. in Income Tax Appeal [Read Order]

The Income Tax Appellate Tribunal (ITAT), Chandigarh Bench, considered the appeal of an assessee regarding its own disallowance under Section 14A of the Income Tax Act, 1961, reiterated that where interest free funds are available in excess of investments, no disallowance under Section 14A can be sustained.

The Assessee, M/s Hero Cycles Ltd. filed its return of income for Assessment Year (AY) 2012-13, disclosing exempt dividend income of rupees nine crore nineteen lakh and long-term capital gains of rupees seven crore fifty nine lakh. Along with the return, it voluntarily made a suo moto disallowance of rupees three crore ninety seven lakh under Section 14A read with Rule 8D of the Income Tax Rules, 1962.

The suo moto disallowance comprised of rupees one crore two lakh on account of interest under Rule 8D(2)(ii) and rupees two crore ninety four lakh on account of administrative expenditure under Rule 8D(2)(iii). The Assessing Officer (AO) proceeded to make an additional disallowance of rupees fourteen crore fifteen lakh ten thousand two hundred thirteen, which was later deleted by the Commissioner of Income Tax (Appeals) [CIT(A)]. However, the Commissioner did not address the assessee’s grievance regarding the excessiveness of its own disallowance.

The Assessee, represented by Ashwani Kumar, Ashish Aggarwal, and Deepali Aggarwal, argued that the suo moto disallowance was wrongly computed. It was contended that no interest disallowance was required at all since the company had sufficient own funds to cover its investments. For administrative expenses, it was argued that the disallowance should have been restricted to only those investments which yielded exempt income, thereby limiting it to about rupees ninety one lakh sixty one thousand instead of rupees two crore ninety four lakh.

The Revenue, represented by Manav Bansal, defended the correctness of the suo moto disallowance. He relied on CBDT Circular No. 5 of 2014 and argued that expenditure relatable to exempt income must be disallowed regardless of whether the assessee claims that no borrowing was used.

The Bench comprising of Vice President, Rajpal Yadav and Accountant Member, Krinwant Sahay examined the assessee’s claim that its suo moto disallowance was excessive. On the issue of interest disallowance under Rule 8D(2)(ii), the Tribunal observed that Hero Cycles had ample own funds in the form of share capital and reserves, which were far greater than the value of its investments.

It applied the principle laid down by the Punjab and Haryana High Court in Bright Enterprises Pvt. Ltd. v. CIT (2013) that when sufficient interest free funds are available, it must be presumed that such funds are used for investments. Thus, the Tribunal held that no interest disallowance was required and directed deletion of the rupees one crore two lakh voluntarily disallowed by the assessee.

The Tribunal clarified that only those investments actually generating exempt income should be considered. The bench also noted that the AO had not recorded proper satisfaction as required under Section 14A(2) before rejecting the assessee’s working.

Consequently, the Tribunal reduced the disallowance from rupees two crore ninety four lakh to rupees ninety one lakh sixty one thousand.

Thus, the ITAT allowed the assessee’s appeal.

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