The Income Tax Appellate Tribunal (ITAT), Mumbai Bench ruled that the disallowance of interest can not be made where interest-free funds are sufficient to cover interest-free investments.
The assessee, Nirshilp Securities Private Limited had earned exempt income in the form of dividends to the tune of Rs 2,03,57,802 /- and had made suo moto disallowance u/s 14A of the Act amounting to Rs 20,35,780/-, being 10% of dividend income while filing its return of income. The AO recomputed the disallowance under section 14A of the Act by applying the computation mechanism provided in Rule 8D(2) of the Rules.
The CIT(A) had deleted the disallowance of interest made under Rule 8D(2)(ii) of the Rules on the ground that the assessee company is having sufficient interest-free funds in its kitty. With regard to the disallowance of indirect expenses under Rule 8D(2)(iii) of the Rules, the CITA held that since the disallowance already made by the assessee is much more than Rs 7,25,221, no further disallowance is warranted in the case.
The assessee is having sufficient interest free funds in the form of share capital and reserves to the tune of Rs 218.14 crores as on 31.3.14 and Rs 250.02 crores which is evident from the bare perusal of the financial statements for the respective period and that the same is much more than the investments made by the assessee.
The revenue has challenged the deletion of disallowance under section 14A of the Act read with Rule 8D(2) of the Rules.
The coram of Judicial Member C.N.Prasad and Accountant Member M.Balaganesh by applying the ratio laid down by the High Court in the case of HDFC Bank Ltd reported in 366 ITR 505 and of the Supreme Court in the case of Reliance Industries Ltd reported in 410 ITR 466, held that no disallowance of interest needs to be made under Rule 8D(2)(ii) of the Rules.
The ITAT while dismissing the appeal of the revenue with regard to disallowance under Rule 8D(2)(iii) of the Rules, the disallowance already made by the assessee was much more than disallowance warranted under the third limb of Rule 8D(2) of the Rules.
Hence the Tribunal directs the AO not to make any disallowance under section 14A of the Act other than the suo moto disallowance already made by the assessee in the return of income, both under normal provisions of the Act as well as in the computation of book profits under section 115JB of the Act.
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