Relief to Reliance Power: ITAT rejects Income tax Dept’s Challenge to Reduced S. 14A Disallowance [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ) dismissed the Income Tax Department's appeal against Reliance Power Ltd., upholding the relief granted by the Commissioner of Income Tax (Appeals) [CIT(A)] by greatly lowering the disallowance made under Section 14A read with Rule 8D of the Income Tax Act, 1961.

The case belonged to Reliance Power Ltd. For the Assessment Year 2016-17, the company filed its return declaring a business loss under the normal provisions and book loss under Section 115JB.

During scrutiny, the Assessing Officer (AO) made a massive disallowance of ₹99.00 crore under Section 14A, alleging that interest and administrative expenses were incurred in relation to exempt income.

On appeal, the CIT(A) [Commissioner of Income Tax (Appeals)] substantially reduced the disallowance to ₹7.33 crore, holding that the AO had wrongly applied Rule 8D without appreciating settled legal principles.

The CIT(A) accepted the assessee’s contention that no interest disallowance under Rule 8D(2)(ii) could be made since Reliance Power had sufficient interest-free funds in the form of share capital and reserves, far exceeding the value of its investments.

The 1st appellate authority stated, based on decisions of the Bombay High Court and the Supreme Court, including Reliance Utilities & Power Ltd. and Reliance Industries Ltd., that a presumption must be drawn that investments were made using interest-free funds when such funds are available.

The CIT(A) further held that for computing administrative expense disallowance under Rule 8D(2)(iii), only those investments which actually yielded exempt income during the year could be considered. Accordingly, the disallowance was recomputed and restricted to ₹7.33 crore.

The Tribunal rejected the Revenue’s contentions and upheld the order of the CIT(A) in its entirety, observing that the issue was squarely covered by earlier decisions of the ITAT in Reliance Power’s own cases for preceding assessment years on identical facts.

According to the ITAT, where interest-free funds are in excess of the value of investments, no disallowance of interest can be made under Rule 8D(2)(ii).

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It further held that for the purpose of disallowance of administrative expenses under Rule 8D(2)(iii), only those investments which actually yielded exempt income during the relevant year can be taken into account, in line with the Special Bench ruling in Vireet Investment Pvt. Ltd.

The two-member bench of Amit Shukla (Judicial member) and Arun Khodpia (Accountant member) found that the CIT(A) had correctly applied these settled legal principles while restricting the disallowance. In the absence of any contrary material or binding judicial precedent placed on record by the Revenue, the ITAT dismissed the appeal.

The appellate tribunal held that the appellate commissioner had correctly followed binding judicial precedents, including earlier orders passed in Reliance Power’s own cases, while restricting the disallowance to a much lower amount.

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