ACIT Vs Reliance Power Ltd (ITAT Mumbai)
The appeal before the Income Tax Appellate Tribunal, Mumbai was filed by the revenue against the order passed by the Commissioner of Income Tax (Appeals)-57, Mumbai, relating to Assessment Year 2016–17. The assessment originated from an order passed under section 143(3) read with section 144C(3) of the Income Tax Act, 1961.
The assessee, Reliance Power Ltd, had filed its return declaring a business loss under normal provisions and a book loss under section 115JB. During scrutiny, the Assessing Officer made a substantial disallowance under section 14A read with Rule 8D, comprising interest disallowance under Rule 8D(2)(ii) and administrative expenses under Rule 8D(2)(iii), aggregating to over ₹99 crore. After adjusting for the assessee’s suo motu disallowance, a net addition of about ₹98.63 crore was made. The Assessing Officer also recomputed book profits under section 115JB and made alternative disallowances under sections 36(1)(iii), 37, and 38.
On appeal, the CIT(A) examined whether invocation of Rule 8D was justified and accepted that the Assessing Officer was entitled to apply Rule 8D, having recorded dissatisfaction with the assessee’s claim. However, on merits, the CIT(A) granted substantial relief.
First, on interest disallowance under Rule 8D(2)(ii), the CIT(A) held that no disallowance was warranted because the assessee’s interest-free funds exceeded the value of its tax-free investments at both the beginning and end of the year. This conclusion followed binding precedents, including earlier orders of the ITAT in the assessee’s own cases for other assessment years, where it was held that when sufficient interest-free funds are available, a presumption arises that investments yielding exempt income are made out of such funds.
