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Uni Deritend Limited v. Cit
Factual and Procedural Background
The assessee, engaged in manufacturing ferrous and non-ferrous investment castings and generation of wind energy, filed a return declaring income for the assessment year 2012-2013. The Assessing Officer (AO) completed the assessment under section 143(3) of the Income Tax Act, determining the assessed income and making certain disallowances, including a disallowance under section 14A read with Rule 8D(2)(ii) of the Income Tax Rules, 1962. The assessee challenged this disallowance before the Commissioner of Income Tax (Appeals) [CIT (A)], who partly allowed the appeal. Dissatisfied, the assessee filed a further appeal before the Tribunal against the order dated 29.1.2016 of the CIT (A)-3, Mumbai.
Legal Issues Presented
- Whether the disallowance under section 14A read with Rule 8D(2)(ii) of the Income Tax Rules, 1962, amounting to Rs. 7,90,685/-, was justified in the absence of borrowing for the purpose of making investments yielding tax-free income.
- Whether the Assessing Officer and CIT (A) erred in not considering that the assessee had sufficient interest-free funds, substantial free reserves, surplus, and paid-up capital, negating the need for such disallowance.
Arguments of the Parties
Appellant's Arguments
- No disallowance was warranted under section 14A read with Rule 8D(2)(ii) as the assessee did not borrow funds specifically for making investments yielding exempt income.
- The assessee is a cash-rich company with significant free reserves, surplus, and paid-up capital totaling over Rs. 70 crore, which exceeded the investment amount in current and non-current investments.
- The AO and CIT (A) failed to comply with binding judgments of the jurisdictional High Court in CIT v. HDFC Bank Ltd. and CIT v. Reliance Utilities and Power Ltd., which were cited before the first appellate authority.
- The disallowance under clause (ii) of Rule 8D(2) was made without proper findings on the availability of interest-free funds and applicability of the said judgments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| CIT v. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom) | Guidance on applicability of disallowance under section 14A read with Rule 8D(2)(ii) regarding interest-free funds and investments yielding exempt income. | The court noted that the CIT (A) confirmed disallowance despite this binding judgment, without giving reasons, necessitating remand for factual findings. |
| CIT v. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom) | Clarification on disallowance under section 14A and Rule 8D(2)(ii) relating to indirect interest expenses on exempt income investments. | Referenced by the assessee and considered relevant by the Tribunal in remanding the matter for fact-finding on the applicability of this precedent. |
Court's Reasoning and Analysis
The Tribunal observed that the CIT (A) confirmed the disallowance under section 14A read with Rule 8D(2)(ii) without providing reasons and disregarded binding High Court judgments cited by the assessee. The Tribunal emphasized the necessity of a factual determination on whether the assessee had interest-free funds that could have been used for investments yielding exempt income. Since the relevant facts were not found or considered by the revenue authorities, the Tribunal held that the matter should be remanded to the AO for limited purposes. The AO was directed to refrain from making disallowances if it concluded, after applying the cited precedents, that no disallowance was warranted under the said rule. This approach ensures adherence to legal precedents and proper fact-finding before making disallowances under section 14A.
Holding and Implications
The Tribunal allowed the appeal of the assessee for statistical purposes and remanded the matter to the AO for limited fact-finding regarding the applicability of disallowance under section 14A read with Rule 8D(2)(ii).
The direct effect of this decision is that the AO must reconsider the disallowance in light of the factual findings and binding High Court judgments. No new precedent was established; rather, the decision enforces compliance with existing legal principles and ensures that disallowances under section 14A are made only after proper factual examination.
D. Karunakara Rao, Accountant Member:— This appeal filed by the assessee on 06.4.2016 is against the order of the CIT (A)-3, Mumbai dated 29.1.2016 for the assessment year 2012-2013. In this appeal, assessee raised the following grounds which read as under:—
“Disallowance u/s 14A r.w.r 8D(2)(ii) of Rs. 7,90,685/-
1. On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in not adjudicating the main ground of the appellant that no disallowance was called for under section 14A r.w.r 8D(2)(ii) on account of indirect interest expenses and hence the disallowance made by the AO to the extent of Rs. 7,90,685/-.
2. The Ld CIT (A) erred in facts in law that the appellant did not borrow any money for the purpose of making investments yielding tax free income and also failed to appreciate that the appellant is cash rich company and has huge free reserves and surplus and paid up capital totalling to Rs. 70,46,86,451/- as against investment in current and non-current investments of Rs. 48,04,11,669/- hence no disallowance was called for u/s 14A r.w.r 8D(2)(ii) to the extent of Rs. 7,90,685/-.”
2. Briefly stated relevant facts of the case are that the assessee is engaged in the business of ‘manufacturing of ferrous and non-ferrous investment castings and generation of wind energy’. Assessee filed the return of income declaring the total income of Rs. 10,24,88,251/-. Assessment was completed u/s 143(3) of the Act and the assessed income was determined at Rs. 10,45,58,263/-. In the assessment, AO made certain additions/disallowances which include disallowance u/s 14A r.w Rule 8D(2)(ii) of the IT Rules, 1962. Aggrieved, assessee raised an appeal before the first appellate authority.
3. During the proceedings before the first appellate authority, after considering the submissions of the assessee, CIT (A) partly allowed the appeal. Again aggrieved with the said decision of the CIT (A), assessee is in appeal before the Tribunal.
4. During the proceedings before us, at the outset, Ld Counsel for the assessee submitted that the disallowance made u/s 14A r.w Rule 8D(2)(ii) of the Act is the subject matter of disallowance. Bringing our attention to the assessment order, Ld Counsel for the assessee submitted that the AO made disallowance under clause (ii) of the IT Rules, 1962 an amount of Rs. 14,49,846/-, which is the solitary issue to be adjudicated before the Tribunal in this appeal. On this issue, Ld Counsel for the assessee raised the argument that the AO and the CIT (A) failed to give finding of the fact that the assessee had sufficient interest free funds and also failed to comply with the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom.) and also the judgment in the case of CIT v. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom.) despite the same were referred by the assessee before the first appellate authority.
5. After hearing both the parties and on perusal of the orders of the Revenue Authorities as well as the cited precedents (supra), we find that the CIT (A) confirmed the addition despite the said binding judgment without giving any reasons. The contents of para 6 of the order of the CIT (A) are relevant in this regard. For deciding this issue, in our opinion, there is a requirement of finding of facts relating to if the assessee is engaged in Mutual Funds and got interest free own funds, which can be presumed to have been found way into the investments that yielded exempt income to the assessee in the year under consideration. For want of finding of the fact, we are of the opinion, as discussed in the open court, the matter should be remanded to the file of the AO for the limited purpose. AO should resist making additions, if any, in case AO comes to the conclusion that the aforesaid judgments are applicable to the facts of the present case on this limited issue relating to the applicability of clause (ii) of Rule 8D(2) of the IT Rules, 1962. Accordingly, the grounds raised by the assessee are allowed for statistical purposes.
6. In the result, appeal of the assessee is allowed for statistical purposes.
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