The ever debatable ‘Disallowance under section 14A’ (read with Rule 8D (2) now has again found a different horizon wherein the disallowance is not attracted (partially). The below mentioned case depicts a situation where interest free funds obtained by the assessee, a real estate developer, far exceeds the investments made by him, presumption was that such investments were sourced out of interest free funds and not out of borrowed funds and in the absence of any nexus between the two, interest disallowance under Rule 8D would not be sustainable in law, and thus, the said disallowance had to be deleted.
Case Law: K. Raheja Corp. (P.) Ltd. v. Deputy Commissioner of Income-tax, CC-4(2), Mumbai, IN THE ITAT MUMBAI BENCH ‘H’ dated 3rd May, 2021 (I.T.A. No. 7463 (Mum.) of 2016).
Brief facts of the case:
The assessee, K. Raheja Corp. (P.) Ltd., being a resident corporate assessee, having its registered office in Mumbai, Maharashtra is a Real Estate Developer. An assessment was framed for the A.Y. 2012-13 u/s 143(3) on 09/02/2015 wherein, the assessee returned loss of Rs.309.18 Lacs whereas, the department determined income of Rs.2518.71 Lacs and in case of MAT, returned Book Profits u/s 115JB for Rs.834.84 Lacs was determined by the department at Rs.4046.67 Lacs. While framing assessment, disallowance u/s 14A was made while computing income under normal provisions as well as while computing Book Profits u/s 115JB of the Income Tax Act, 1961. (“the Act”)
Matter of Litigation:
1. Whether Section 14A (read with Rule 8D) be invoked in said case?
2. Whether, under section 115JB (2), i.e. Minimum Alternate Tax (MAT), the disallowance computed here shall be added to the Book Profits as required under clause (f) to Explanation 1 to Section 115JB (2) of the Act?
Tax Authority’s contention before the Tribunal:
1. In the A.Y. 2012-13, the assessee had opening and closing investments in shares of Rs.258.39 Crores & Rs.441.38 Crores respectively and had also debited interest expenditure of Rs.194.28 Crores in its Profit and Loss Account. Also, the assessee had earned exempt dividend income of Rs.73.22 Lacs but did not offer any suo-moto disallowance as computed under Rule 8D (2) in the statement of income. Thus, The Ld. AO opined that disallowance u/s 14A would be attracted simply because the assessee had investments in its accounts and had earned dividend income.
2. Consequently, The Ld. AO worked out aggregate disallowance of Rs.3143.96 Lacs which comprised of interest disallowance u/r 8D(2)(ii)* for Rs.2,969.01 Lacs and indirect expense disallowance u/r 8D(2)(iii)** for the balance amount. The said disallowance was added to normal income as well as while computing Book Profits u/s 115JB of the act.
3. The CIT(A) noted that there were fresh investments of Rs.183 Crores in group concerns during the said year and the interest expenditure was higher by over Rs.55 Crores in comparison to the preceding year. Therefore, part of the interest was incurred towards fresh investment of Rs.183 Crores. This being so, the disallowance would be attracted.
4. Further, in terms of CBDT Circular No. 5 of 2014 dated 11/02/2014, the disallowance would be made even if no exempt income was earned by the assessee during the year. The assessee made fresh investments of Rs.183 Crores and could not establish that the investments were out of free funds available with the assessee.
*{amended now vide notification no. 43/2016 dated 2 June, 2016}
**{removed now vide notification no. 43/2016 dated 2 June, 2016}
Taxpayer’s contention before the Tribunal:
1. The assessee defended its stand by submitting that no part of interest qualifies for disallowance since it was the finding of Tribunal in earlier years (AYs. 1994-95 to 2007-08) in its own case that the assessee had surplus interest-free funds to make these investments.
2. Another plea was that no amount was to be disallowed on investment of Rs.396.10 Crores since no dividend was earned from those investments.
3. Before the Ld. CIT(A), the assessee relied upon the findings of Tribunal in earlier years i.e., AYs 1994-95 to 2007-08, which rendered a finding that the assessee had surplus interest free funds to make the investments. In AY 2008-09, ITA No.6900/Mum/2011 order dated 04/04/2016, the coordinate bench had rendered similar findings. Similar view was also expressed in Tribunal order for AY 2009-10, ITA No.366/Mum/2013 order dated 08/09/2016. In the said order, the issue of expense disallowance u/r 8D(2)(iii) was set aside for de-novo computation with certain direction. Again, similar view has been taken in Tribunal order for AY 2010-11, ITA No.1004/Mum/2015 order dated 16/08/2019.
4. Therefore, a presumption could be drawn that that interest free funds far exceeded the investments in the said assessment year as well and thus, such investments were out of those funds. Further, no part of interest could be attributed towards investment in shares.
Analysis by ITAT
The ITAT did not shy away from the fact that in the assessee’s own case for earlier years, the disallowance u/s 14A was not attracted for investments made out of interest free funds.
The matter of disallowance u/r 8D (2)(iii) **, under normal provisions, was restored back with a direction to consider only those investments which have yielded exempt income to the assessee.
Next, with regard to disallowance made u/s 14A of the Act while computing book profits u/s 115JB, the ITAT stressed on the computation mechanism provided in rule 8D (2) which cannot be imputed into clause (f) to Explanation 1 to Section 115JB(2) of the Act as held by the Special Bench of Delhi Tribunal in the case of Vireet Investment (P) Ltd. reported in 165 ITD 27. However, the Ld. AO was directed to consider the disallowance of expenses incurred for the purpose of earning exempt income based on actual amounts debited to profit & loss account.
Also, in AY 2011-12, ITA No.6002/Mum/2016 order dated 10/01/2018, interest disallowance was deleted by the coordinate bench and expense disallowance estimated at Rs.5 Lacs. Thus, so far as the source of investment up-to AY 2011-12 is concerned, it was a consistent finding of the ITAT that the assessee had surplus interest free funds to make the investments.
As per the observation of Ld. CIT(A), there were fresh investments of Rs.183 crores during the year which could have been sourced out of borrowed funds. However, no such nexus has been established by Ld. AO between the two, during the assessment proceedings.
Another pertinent fact is that own interest free funds far exceed the investments made by the assessee and therefore, the presumption as drawn in earlier years would still prevail that the investments were sourced out of interest free funds and not out of borrowed funds unless the nexus between the two was established and brought on record by Ld. AO. In the absence of such nexus, the interest disallowance would not be sustainable in law.
Conclusion:
Therefore, based upon the above analysis, the ITAT decided to delete the interest disallowance made u/r 8D(2)(ii) and in case of expenses disallowance u/r 8D(2)(iii), the Ld.AO has been directed to re-compute the same after considering only those investments which have yielded exempt income during the year.
Additionally, w.r.t. the adjustment of disallowance u/s 14A while computing book profits u/s 115JB, the matter stood restored back to the file of Ld. AO on similar lines as directed by Tribunal in order for AY 2010-11, ITA No.1004/Mum/2015 order dated 16/08/2019.
Consequently, these grounds stand partly allowed to the extent, as explained above.
*****
Authors: By: Abhinandan Jain and Kumari Sonali
Author Bio
