Baerlocher India Additives Pvt. Ltd. Vs DCIT (ITAT Mumbai)
Summary: The Mumbai Bench of the Income Tax Appellate Tribunal held that the Assessing Officer could not invoke Rule 8D for computing disallowance under section 14A without first examining the assessee’s accounts and recording objective dissatisfaction with the correctness of its suo motu disallowance. Baerlocher India Additives Pvt. Ltd., engaged in manufacture and supply of PVC stabilisers and polymer additives, earned exempt dividend income of Rs.1,17,29,599/- during AY 2020-21 and voluntarily disallowed Rs.3,48,550/- under section 14A.
The assessee explained that Kotak Wealth Management managed its investment portfolio without charging it any fee or commission and that the voluntary disallowance represented proportionate salary costs of its Finance Head and Accounts Executive together with communication expenditure attributable to investment activity. The Assessing Officer nevertheless applied Rule 8D to the annual average investment value of Rs.44,24,50,489/-, computed disallowance of Rs.44,24,505/- and, after reducing the assessee’s suo motu disallowance, made an additional disallowance of Rs.40,75,955/-. The CIT(A) upheld the addition on the basis that the assessee maintained common books and bank accounts, funds were intermingled and total interest expenditure of Rs.10,83,361/- had been debited to the profit and loss account.
The Tribunal held that these general observations did not constitute the satisfaction required under section 14A(2). The AO had not identified any defect in the assessee’s employee-cost-based computation, any omitted expenditure relating to exempt income, or why the allocation percentages adopted by the assessee were incorrect. The Tribunal also noted that the assessee’s interest-free shareholders’ funds of approximately Rs.213.06 crore as on 31.03.2020 substantially exceeded tax-free investments of approximately Rs.55.19 crore. Further, of total interest expenditure of Rs.10,83,361/-, Rs.46,410/- represented interest under sections 234A, 234B and 234C and Rs.10,32,225/- represented interest on delayed payments to MSME suppliers, both already disallowed; only Rs.4,726/- related to the bank cash-credit facility, with no nexus established with mutual-fund investments.
