DCIT Vs Welspun Mercantile Limited (ITAT Mumbai)
Conclusion: Excessive disallowance made under Section 14A was restricted as AO had failed to record any dissatisfaction with assessee’s claim regarding the expenditure incurred to earn tax-exempt income, which was a mandatory requirement before invoking Rule 8D for disallowance under Section 14A.
Held: Assessee-company, had filed a nil return, showing income from business and short-term capital gains, both of which were adjusted against brought-forward losses for the assessment year 2014-15. During scrutiny, AO noted that assessee had earned a dividend income of Rs. 2.98 crore, which was claimed as exempt under Section 10(34). Assessee had voluntarily disallowed Rs. 1,10,711 under Section 14A. Still, AO, invoking Rule 8D, computed a much higher disallowance of Rs. 84.78 lakh, citing that assessee had used borrowed funds to make investments in shares. Aassessee carried the matter before CIT(A) and strongly contended that no interest disallowance had to be made as the assessee had made the investment in shares from its interest free funds. CIT(A) found that the interest free funds available with the assessee were Rs.164.29 Crores whereas investment in shares were Rs.170.99 Crores. Therefore, some of the borrowed capital had been invested in shares and accordingly, disallowed Rs. 76,66,092/- on the part of interest under Rule 8D(2)(ii). Further, CIT(A) found that assessee had debited administrative expenditure at Rs.1,56,794/-, therefore, disallowance as per Rule 8D(2)(ii) was restricted to this amount and gave part relief to the assessee. Interestingly, both Revenue and assessee filed cross-appeals before ITAT in which Revenue had contested CIT(A)’s reduction of the disallowance, and assessee had appealed, stating that no disallowance should have been made. ITAT, by going through established precedents, held that AO had not recorded any dissatisfaction with assessee’s voluntary disallowance, nor had he provided any basis for invoking Rule 8D. It was held that AO must first be dissatisfied with assessee’s claim and record reasons for such dissatisfaction before applying Rule 8D. Since AO had failed to do so, ITAT ruled that the disallowance under Section 14A was unjustified and upheld assessee’s voluntary disallowance of Rs. 1,10,711.
