ITAT: Disallowance under Section 14A of Income Tax Not Applicable Where No Exempt Income is Received/Receivable During Relevant Previous Year
ITAT: Disallowance under Section 14A of Income Tax Not Applicable Where No Exempt Income is Received/Receivable During Relevant Previous Year
The Income Tax Appellate Tribunal (ITAT), by its two-member bench of Anubhav Sharma (Judicial Member) and Anil Chaturvedi (Accountant Member) observed that Section 14A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') envisages that there should be actual receipt of income, and hence Section 14A of the Act will not apply where no exempt income is received or receivable during the relevant previous year.
The assessee/appellant- Indian Farmers Fertiliser Cooperative Limited is a multi-state cooperative society registered under the Multi-State Cooperative Societies Act 2002. The assessee is engaged in the manufacturing and trading of chemical fertilizers through its various operating units.
The case of the assessee was selected for scrutiny and, thereafter, assessment was framed under Section 143(3) of the Act vide order dated 24.12.2018 and the total income was determined at Rs.962,72,12,520.
The Assessing Officer (AO) during the assessment proceedings found that the assessee had earned tax-free income by way of dividends. The AO further noted that the assessee had investments totaling Rs. 1701.83 crore, as opposed to Rs. 798.49 crore in the previous assessment year.
AO noted that during the year under consideration, the total amount of interest-bearing funds borrowed by the society amounted to Rs.14,116.05 crore whereas its total requirement of Working Capital and Fixed Assets amounted to Rs.26,101.97 crore. He further noted that the investments during the year under consideration was Rs.1701.83 crore as against Rs.798.49 crore in earlier years. AO, therefore, concluded that certain expenses must have been incurred by the assessee to make such investments. He, thereafter, by applying the method prescribed under Rule 8D worked out the aggregate disallowance under Section 14A of the Act at Rs.55.96 crore, and made its disallowance.
Aggrieved by the order of AO, assessee carried the matter before Commissioner of Income Tax (Appeals) [CIT(A)]. CIT(A) deleted the addition made by AO. Aggrieved by the order of CIT(A), Revenue filed an appeal before the ITAT.
The first issue that came for consideration before the ITAT was with respect to the disallowance under Rule 8D(2)(ii) of the Income-tax Rules with respect to interest.
The ITAT noted that CIT(A) while deciding the issue in favor of the assessee had reasoned that, on the loan that have been borrowed by the assessee for working capital purpose, Banks had imposed stringent End-use conditions which prohibited the use of funds for investments in shares or other companies or capital market.
The End-Use of the funds were monitored by considering the auditors certificate for End-Use compliance that were filed by the assessee. CIT(A) found that no penal interest has been charged by the bank to the assessee or the loans have been recalled for violating the conditions of diverting the funds for making investments in shares or capital markets. CIT(A) had thereafter given a finding that the interest-bearing funds borrowed by the assessee have not been utilized for making the investments.
The ITAT found that identical issue had arose in assessee's own case for Assessment Year (AY) 2011-12 wherein the CIT(A) had decided the issue in favor of the assessee and the order of CIT(A) was upheld by the Co-ordinate Bench of Tribunal. Against the order passed by the Tribunal, Revenue had carried the matter before Delhi High Court. The High Court had upheld the order of Tribunal and had held that no substantial question of law arise for consideration.
The bench remarked that Revenue had not placed any distinguishing feature in the facts of the case in the year under consideration and that of AY 2011-12 nor placed any material to demonstrate that the order rendered by Delhi High Court in assessee's case for AY 2011-12 has been set aside, overruled, and stayed by higher judicial forum. In such a situation, ITAT found no reason to interfere with the order of CIT(A).
The assessee had further raised the ground that the CIT(A) had erred by ignoring the fact that based on the jurisprudence, for the purpose of Rule 8D(2)(iii), Average Value of Investments will include only those investments which have yielded exempt income and thus disallowance could not have exceeded Rs. 2.48 crore.
The bench referred to the judgment passed by Delhi High Court in Delhi International Airport (P.)(2022), held that Section 14A of the Act envisages that there should be actual receipt of income and hence Section 14A of the Act will not apply where no exempt income is received or receivable during the relevant previous year.
The Tribunal reckoned with the assessee's contention that the AO had considered the average value of the entire investments (which included investments from which no dividend had been received by the assessee) for working out of the disallowance under Rule 8D(2)(iii) of the Income-tax Rules.
The bench found it appropriate to restore the issue back to the file of AO and directed him to work out the disallowance under Rule 8D(2)(iii) of the Income-tax Rules on the basis of investments, which have yielded exempt income and in accordance with law.
Thus, the Tribunal observed that the ground of the assessee and the appeal was allowed for statistical purposes.
