No Section 14A Disallowance if Assessee has Surplus Interest-Free Funds Exceeding Exempt Income Investments

Aditya Birla Nuvo Limited Vs ACIT (ITAT Mumbai)

Introduction: Aditya Birla Nuvo Limited secured a significant victory when the Income Tax Appellate Tribunal (ITAT) Mumbai granted relief in a recent appeal. The ruling pertained to the disallowance under Rule 8D(2) of the Income Tax Rules, considering investments that had generated exempt income.

Detailed Analysis:

1. Background of the Appeal: The appeal by Aditya Birla Nuvo Limited was previously heard by the ITAT Mumbai, and an order was issued on December 20, 2019. Subsequently, a Miscellaneous Application was filed by the assessee to recall the order for the purpose of addressing specific issues.

2. Recalling the Order: The order was recalled to decide two issues raised by the assessee. The first issue concerned the disallowance of interest under Section 14A of the Income Tax Act, read with the second limb of Rule 8D(2) of the Income Tax Rules. The second issue related to the provision made for leave salary.

3. Disallowance of Interest under Section 14A: The ITAT Mumbai ruled on the disallowance under Rule 8D(2)(iii) of the Income Tax Rules. It clarified that the availability of own funds had no relevance to this particular disallowance. The ruling emphasized that only investments that had actually yielded exempt income should be considered for disallowance under Rule 8D(2).

4. Recalling the Order for Interest Disallowance: The order was recalled to adjudicate the disallowance of interest under Section 14A, read with Rule 8D(2)(ii). The issue revolved around whether the assessee had sufficient interest-free funds for investments, justifying the non-disallowance of interest.

5. Applicability of Previous Tribunal Order: The issue was remanded back to the Assessing Officer (AO) to decide afresh. The decision was influenced by a Supreme Court case, South Indian Bank Ltd. vs. ITO, where the Court held that no disallowance of interest should be made when the assessee had surplus funds.

Conclusion: Aditya Birla Nuvo Limited received relief from the ITAT Mumbai, as the tribunal ruled that investments yielding exempt income must be considered for the purpose of working out the disallowance under Rule 8D(2). The decision underscores the importance of a thorough examination of the availability of interest-free funds for investment-related disallowances. The ruling in favor of Aditya Birla Nuvo Limited by the ITAT Mumbai provides clarity on the disallowance of interest under Section 14A, read with Rule 8D(2), for investments generating exempt income. It emphasizes the need for a precise assessment of interest-free funds and reaffirms the importance of following established rules and principles in tax matters. This decision contributes to greater transparency and consistency in tax assessments.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

The aforesaid appeal was heard by this Tribunal and order was passed vide order dated 20/12/2019. Thereafter on Miscellaneous Application filed by the assessee the order was recalled only for deciding one issue raised in additional ground after observing as under:-

“By virtue of this Miscellaneous Application, the assessee seeks to recall the order passed by this Tribunal on two counts:-

(a) Non adjudication of additional ground of appeal with regard to disallowance of interest u/s 14A of the Act rw second limb of Rule 8D(2) of the Rules

(b) Non adjudication of original ground raised by the assesee with regard allowability of provision made for leave salary.

2. We have heard the rival submissions and perused the relevant materials available on record. With regard to the issue of disallowance u/s 14A of the Act, we find that the assessee had raised original ground before us with regard to disallowance of administrative expenses made under third limb of Rule 80(2) of the Rules. This Tribunal had adjudicated this original ground alone, while disposing off the appeal. We also find that assessee had raised an additional ground praying for directions to Ld. AO to delete the interest disallowance made voluntarily by the assessee in the return of income, on the ground that assessee was having sufficient interest free funds in its kitty for the purpose of making investments. We find that this Tribunal had admitted the said additional ground while disposing off the appeal, but had omitted inadvertently to adjudicate the said additional ground. This constitute mistake parent from record in the order of this Tribunal within the meaning of section 254(2) of the Act. When this was put to Ld. DR, the Ld.DR fairly agreed for recalling of this order for this limited extent. Accordingly, we deem it fit to recall the order passed by this Tribunal for the limited purpose of adjudication of additional ground Nos.1 and 2 raised by the assessee with regard to deletion of suo-moto disallowance of interest made under second limb of Rule 8D(2) of the Rules.

3. With regard to another ground raised by the assessee for allowability of provision for leave salary /compensated absence as per actuarial valuation of Rs.3,49,36,683 u/s 438(f) of the Act, we find that this Tribunal had adjudicated the alternative contention raised by the assessee that the issue needs to be decided based on the final outcome of Hon’ble Supreme Court in the case of Exide Industries Limited, But, the Ld. AR pointed out that this Tribunal had not adjudicated the original contention of the assessee raised in the original ground that this provision for leave salary is allowable as deduction, on the premise that “any sum payable mentioned in section Clause (f) of section 43B is independent of any sum payable” as defined for the purpose of Clause (a) of section 43B in accordance with the provisions of Explanation (2) of section 43B. The Ld. AR pointed out that this issue is already decided in favour of assessee in earlier year in assessee’s own case, which order was also cited by the Ld.AR at the time of hearing of the original appeal, but had apparently missed the attention of the Bench by inadvertence, while disposing off the appeal. When this was put to Ld. DR, the Ld. DR fairly agreed for recalling of the order for the limited extent of adjudication of original contention raised by the assessee in ground No.3.

4. We find lot of force in the argument advanced by the Ld. AR and hold that non adjudication of the original contention of original ELLATE ground No.3 and not considering the order of this Tribunal in assessee’s own case for earlier year constitute mistake apparent from record within the meaning of section 254(2) of the Act. Hence, the order passed in this regard requires to be recalled. However, we had already adjudicated the issue on the alternative contention raised by the Ld. AR, while disposing off the appeal, which also would be required to be recalled in order to have a single uniform decision on the impugned issue. Hence, we deem it fit and appropriate to recall the order passed by this Tribunal in entirety with regard to ground No.3 of original grounds of appeal.

5. In the result, the Miscellaneous Application Assessee is allowed in the aforesaid terms.

2. We find that in so far as the issue relating to Section 14A has been dealt by the Tribunal vide its order dated 20/12/2019, wherein the Tribunal has adjudicated this issue after observing as under:-

2.7. From the above, it could be seen that the dispute which went to the ld. CIT(A) was only with regard to disallowance of indirect expenses vis-à-vis Rule 8D(2) (iii) of the rules. Out of the total disallowances, worked out by the ld. AO at 22.46 Crores towards administrative expenses, the ld. CIT(A) restricted the same to 11.93 Crores as detailed supra. The issue which has to be decided by us also is only with regard to disallowance made under Rule 8D(2)(iii) of the rules for which purpose, the availability of own funds with the assessee company has got no relevance, hence, the argument made by the ld. AR in that regard and reliance placed by him on certain decisions need not be adjudicated at all. We find that a Special Bench of Delhi Tribunal in the case of Vireet Investments reported in 165 ITD 27 had held that only those investments which had yielded exempt income should be considered for the purpose of working out the disallowance under rule 8D(2) of the rules. Accordingly, we direct the ld. AO to recompute the disallowance under rule 8D(2)(iii) of the rules by considering only those investments which had actually yielded exempt income and reduce a sum of Rs.3.02 Crores which had already been disallowed by the assessee in the return of income towards administrative expenses. Accordingly, the ground No.1 of original grounds and additional grounds 1 & 2 raised by the assessee and ground No.1 of revenue are partly allowed.

3. Now, the order has been recalled for adjudicating additional ground of appeal with regard to disallowance of interest u/s.14A r.w. Rule 8D(2)(ii). Originally assessee has received dividend income of Rs.16,81,44,106/- and has made suomoto disallowance u/s.14A of Rs.83,04,00,000/- which constitute the following:-

4. The ld. AO had made further disallowance under Rule 8D(2)(iii) of Rs.22.46 Crores and after giving benefit of the disallowance of Rs.3.02 Crores offered by the assessee under Rule 8D(2)(iii), had finally disallowed of Rs.19.44 Crores under Rule 8D(2) (iii). The Tribunal had only adjudicated the disallowance of indirect expenses under Rule 8D(2)(iii) and not 8D(2)(ii). This order has been recalled for the limited purpose of deciding this issue.

5. Before us, it has been stated that assessee had sufficient interest free funds for the purpose of making investment and therefore, no disallowance should be made. We find that this precise issue was taken in A.Y.2010-11 wherein the Tribunal has remanded back this issue to examine if assessee had surplus interest free funds far exceeding the investment made which has yielded exempt income, then no disallowance under Rule 8D(2) should be made. Accordingly, this issue of disallowance of interest under Rule 8D (2) is remanded back to the file of ld. AO to decide this issue afresh even though assessee might have suo-moto offered disallowance which now has been claimed that no disallowance should be made in view of the decision of the Hon’ble Supreme Court in the case of South Indian Bank Ltd reported in 438 ITR 1 (SC), wherein Hon’ble Supreme Court has held that assessee has surplus funds and no disallowance of interest can be made.

5. Since similar issue in the order of ITA No.4220/Mum/2015 has been recalled for adjudicating the disallowance of interest cost of Rs.59.66 Crores u/s.14A0., therefore, our finding given in the appeal of ITA No.4220/Mum/2015 shall apply mutatis mutandis in this appeal also. Accordingly, this issue is allowed in favour of the assessee.

6. In the result, appeal of the assessee is allowed.

Order pronounced on 22nd August, 2023.