Income Tax Appellate Tribunal (ITAT) Kolkata in a recent judgment has held that in the absence of requisite satisfaction recorded by the Assessing Officer showing how the disallowance offered by the assessee under section 14A read with Rule 8D was not correct having regard to its books of account, it was not permissible to invoke section 14A

Case Details:
I.T.A. No. 171/KOL/ 2012 AY: 2008-09
Hindustan Motors Limited (Appellant) vs. Deputy Commissioner of Income Tax (Respondent)
Date of Order: 20-11-2015

Brief Facts of the Case:
The appellant company was engaged in the business of manufacturing and sale of cars, etc. The return of income for the year under consideration was filed by it declaring total income of Rs.50,97,10,615/-. In the said return, dividend income of Rs.1,59,83,440/- received on shares was claimed to be exempt by the assessee. The disallowance on account of expenditure incurred in relation to the earning of the said exempt income was also offered by the assessee under section 14A of the Act read with Rule 8D to the extent of Rs.36,51,843/-. However, the Assessing Officer (AO) was of the view that the computation of the said disallowance as worked out by the assessee was not in accordance with the relevant provisions of the Income Tax Act. He noted that expenditure incurred on interest amounting to Rs.14,40,52,291/- was claimed as deduction by the assessee, but the same was not considered for the purpose of computing the disallowance to be made under section 14A read with Rule 8D. He accordingly recomputed the disallowance under section 14A read with Rule 8D at Rs.2,47,79,104/- taking into consideration the amount of deduction claimed by the assessee on account of interest also and made a further disallowance of Rs.2,11,27,261/- under section 14A read with Rule 8D.

Before CIT(Appeals), the assessee contended that there was no interest expenditure, which was required to be allocated under Rule 8D(ii) of the Income Tax Rules for the purpose of computing disallowance under section 14A. it was also submitted that the Capital and reserves of the appellant during the were Rs.174.49 crores whereas the opening investment balance was Rs.70.61 and the appellant had invested Rs.1.18 crores during the year. However, CIT(A) did not convince by the assessee’s contentions and relying on the decision of the Hon’ble Calcutta High Court in the case of ISG Traders Ltd. –vs.- CIT (ITA No. 264 of 2003) and in the case of Dhanuka & Sons –vs.- CIT [12 Taxman.com.227), he confirmed the disallowance made by the Assessing Officer under section 14A of the Act read with Rule 8D.

Important Excerpts from ITAT Judgment
It is observed that the investment in shares on which the exempt dividend income is earned by the assessee during the year under consideration was actually made in the earlier years and in the assessment completed for assessment year 2006-07 under section 143(3), no disallowance on account of interest was made by the Assessing Officer under section 14A after recording a finding that the borrowed funds were entirely utilized by the assessee for the purpose of business and the same were not used for making any investment in shares. Even in the assessment completed for A.Y. 2007-08 under section 143(3), no disallowance under section 14A on account of interest was made by the Assessing Officer thereby accepting that the investment in shares was made by the assessee out of its own funds and there was no utilization of interest bearing borrowed funds for making such investment. As pointed out by the ld. Counsel for the assesese from the relevant documentary evidence, the investment made in shares by the assessee-company in the earlier years has continued substantially in the year under consideration and there being no fresh investment made by the assessee in shares, it follows that investment in shares is entirely made by the assessee out of its own funds and there was no utilization of borrowed funds for making such investment as found by the Assessing Officer himself while completing the assessments for the earlier years. In this regard, ld. D.R. has contended that Rule 8D having been made applicable for the year under consideration for the first time, the issue has to be looked into from different angle and the view taken by the Assessing Officer in the earlier years has no relevance. We are unable to accept this contention of the ld. D.R. Once it is found that the investment in shares is made by the assessee out of its own funds and there is no utilization of borrowed funds for making such investment, we are of the view that no disallowance on account of interest under section 14A can be made even by applying Rule 8D as the said Rule 8D will have application only in such cases where there is any nexus between the interest bearing borrowed funds and investment made in shares. Even a perusal of the balance-sheet of the assessee-company as on 31.03.2008 shows that sufficient own funds to the extent of about Rs.132 crores were available with the assessee-company at the relevant time and the same being more than the investment of about Rs.72 crores made in shares, we are of the view that there was no case for making disallowance on account of interest under section 14A even by applying Rule 8D as the assessee had sufficient own fund to make investment in shares and the interest bearing borrowed funds were not utilized for making such investment.

It is also observed that in the computation of total income, disallowance of Rs.2,47,79,104/- was offered by the assessee under section 14A in relation to the expenditure incurred in relation to earning of exempt income and there was no reason given by the Assessing Officer, having regard to the accounts of the assessee, to show his dissatisfaction with the correctness of quantum of expenditure disallowed by the assessee under section 14A. In the case of REI Agro Limited (supra) cited by the ld. Counsel for the assessee, it was held by the Coordinate Bench of this Tribunal that where the assessee makes a claim that only a particular amount is to be disallowed under section 14A and if the Assessing Officer proposes to invoke section 14A, he has to record the satisfaction as to how the claim of the assessee is not correct having regard to the accounts of the assessee. It was held that if there is no such satisfaction recorded by the Assessing Officer, no disallowance could be made by him by invoking the provisions of section 14A. Keeping in view this decision of the Coordinate Bench of this Tribunal in the case of REI Agro Limited, which has been affirmed by the Hon’ble Calcutta High Court, we hold that in the absence of requisite satisfaction recorded by the Assessing Officer showing how the disallowance offered by the assessee under section 14A was not correct having regard to its books of account, it was not permissible to the Assessing Officer in law to invoke section 14A and make a further disallowance. As such, considering all the facts of the case, we are of the view that the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) under section 14A read with Rule 8D is not sustainable either in law or on the facts of the case and deleting the same, we allow Ground No. 1 of the assessee’s appeal.

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