2022 (4) TMI 1377 - AT - Income Tax

Disallowance made u/s. 14A read with Rule 8D - assessee had suo moto disallowed an amount - Mandation of recording satisfaction - HELD THAT - We find that AO in his entire order except giving his general remarks has nowhere given any categorical satisfaction as to how the working of suo moto disallowance made by the assessee for the purpose of attributing the expenditure for earning exempt income is incorrect having regard to the accounts maintained by the assessee. Interestingly the AO has noted that assessee has not made any disallowance u/s. 14A therefore he is not satisfied with the correctness of the assessee even when suo moto disallowance was offered. Thus it clearly shows that AO has not applied his mind even the working of the assessee and has mechanically proceeded to make the disallowance not only under Rule 8D(2)(ii) and under Rule 8D(2)(iii). First of all it is not in dispute that assessee had huge interest free funds which have also been noted by the CIT(A). Thus now in view of the judgments of South Indian Bank 2021 (9) TMI 566 - SUPREME COURT wherein it has been held that where assessee had interest free funds available which exceeds the investment made in tax free fund security then no interest expenditure can be disallowed and it has to be presumed that it is out of assessee s own fund and proportionate disallowance could not warrant under section 14A even where no separate accounts were maintained by the assessee and other expenditure made for earning tax free income It is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it would be not permissible for the Revenue to make an estimation of a proportionate figure. Disallowance could be legally impermissible for the investment made by the assessee in bonds/shares using interest free funds under Section 14A. Thus proportionate disallowance of interest is not warranted under section 14A for investments made in tax-free bonds/securities which yielded tax free dividend and interest to assessee banks where interest free funds are available exceeded their investments. Thus no disallowance on account of section 14A can be made. We find that AO has not recorded his satisfaction while proceeding to make the disallowance under Rule 8D. The contention of the ld. CIT DR does not find any support from the order of AO that he has recorded his satisfaction albeit he has not even applied his mind on the facts before him which is evident from the fact that he has not even seen the working of disallowance offered by the assessee before him. Therefore aforesaid finding of the ld. CIT(A) which is based on earlier year order of the Tribunal is confirmed and accordingly entire disallowance made u/s. 14A is deleted. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income-tax Act, 1961.
2. Assessing Officer's satisfaction regarding the correctness of the assessee's disallowance.
3. Availability of interest-free funds for investment.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The Revenue raised the issue of disallowance amounting to Rs. 1,36,00,64,114/- under Section 14A read with Rule 8D. The Assessing Officer (AO) noted that the assessee had shown significant investments in non-current investments totaling Rs. 2,26,759.15 lacs and had earned exempt income of Rs. 167.83 lacs. The assessee had suo moto disallowed Rs. 14,96,887/-, but the AO computed the disallowance at Rs. 1,36,15,61,000/- after crediting the suo moto disallowance, resulting in an addition of Rs. 1,36,00,64,113/-.

2. Assessing Officer's Satisfaction:
The assessee contended that the AO did not record his satisfaction regarding the incorrectness of the disallowance offered by the assessee. The Tribunal emphasized that under Section 14A(2), the AO must determine the amount of expenditure incurred in relation to exempt income if he is not satisfied with the correctness of the assessee's claim. The Tribunal noted that the AO had not recorded any dissatisfaction regarding the disallowance made by the assessee and had not identified any specific expenditure incurred in connection with the investment activity.

3. Availability of Interest-Free Funds:
The assessee argued that it had substantial interest-free funds amounting to Rs. 4,94,048.40 lacs, which exceeded the investments of Rs. 1,92,750.91 lacs in shares. The Tribunal referred to the assessee's own case for AY 2011-12, where it was held that if the assessee had sufficient interest-free funds, no disallowance could be made under Rule 8D(2)(ii) for interest expenditure. The Tribunal reiterated that the AO must record dissatisfaction with the assessee's computation before invoking Rule 8D, which was not done in this case.

Conclusion:
The Tribunal found that the AO had not applied his mind and had mechanically proceeded to make the disallowance under Rule 8D. Given that the assessee had substantial interest-free funds, the Tribunal held that no disallowance on account of interest expenditure could be made. The Tribunal also noted that the AO had not recorded his satisfaction regarding the assessee's disallowance, which is a prerequisite for invoking Rule 8D. Consequently, the Tribunal confirmed the CIT(A)'s order and deleted the entire disallowance made under Section 14A, dismissing the Revenue's appeal.

Order Pronouncement:
The order was pronounced on the 11th day of April, 2022.