IDFC Limited Vs DCIT (ITAT Chennai)
Conclusion: AO was directed to limit the disallowance under Section 14A to 0.5% of exempt income earned by the assessee based on Rule 8D(2)(iii) as held by the Ld. Special Bench of ITAT, New Delhi in the case of ACIT vs. Vireet Investment Pvt. Ltd. in ITA No.502/Del/2012 dated 16.06.2017, which ratio had been upheld by the Hon’ble Bombay High Court.
Held: Assessee-company received dividend income of Rs. 134.25 crore and claimed a net exempt income of Rs. 133.50 crore under Section 10(34). It allocated Rs.74.98 lakh as expenses incurred to earn this exempt income. However, AO invoking Rule 8D, recalculated the expenses at Rs. 210.31 crore and disallowed this amount under Section 14A. Assessee challenged the disallowance before the Chennai bench of ITAT arguing that the disallowance of Rs. 134.25 crore under Section 14A was excessive and not justified because only Rs. 74.98 lakh had been spent to earn the exempt income. AO rejected assessee’s contention that only interest-free funds were used to make investment, yielding dividend income. AO referred to stand taken by assessee in earlier years up to AY 2006-07, where assessee had been claiming that no interest expenditure had been incurred to earn exempt interest income u/s. 10(23G) of the Act, as own funds were used for funding assets yielding exempt interest income under section 10(23G) and borrowed funds were used to make investment in other assets including dividend earning assets. AO observed that, with the cessation of Section 10(23G) benefits, assessee had altered its stand and now claiming that its own funds were used to earn the dividend income. AO concluded that investments, yielding dividend income , made earlier still exist and therefore were made from borrowed funds and, accordingly, disallowed expenses under Section 14A as per Rule 8D. It was held that regarding the adjustment made by AO under Rule 8D(2)(i) of the Rules (direct expenditure), the action of the A.O computing the direct expenses of Rs. 74,98,536/- was confirmed which assessee itself had suo-moto disallowed. Next regarding computation of disallowance under Rule 8D(2)(ii) of the Rules (indirect expenditure), AO while computing the same at Rs.193,81,01,883/- had taken note of certain relevant facts which had not been properly confronted to the assessee and therefore, there was per-se violation of nature justice qua the assessee qua the relevant Assessment Year and therefore, the computation under Rule 8D(2)(ii) was restored back to the file of AO and AO was directed to give proper opportunity to the assessee and consider the assessee’s submission and relevant documents in support thereto and thereafter to pass order in accordance to law after hearing the assessee. Coming to computation under Rule 8D(2)(iii) of the Rules was concerned, AO was directed to compute the same at 0.5% of the investment yielding exempt income as held by the Ld. Special Bench of ITAT, New Delhi in the case of ACIT vs. Vireet Investment Pvt. Ltd. in ITA No.502/Del/2012 dated 16.06.2017, which ratio has been upheld by the Hon’ble Bombay High Court.
