Case summary, Income Tax

ITAT Kolkata Decides: Can Disallowance Under Section 14A be Made if the Interest Earned is More than the Interest Paid in the Relevant AY?

Issue: Whether CIT(A) erred in confirming the addition of INR 21,74,843 by the AO?

Case name: Salarpuria Investments Pvt. Ltd. v. DCIT


  • The assessee is an NBFC Company.
  • The AO made an addition to the tune of INR 21,74, 843 to the income of the assessee, by disallowing the same under Section 14A read with Rule 8D(2)(ii).
  • The assessee approached the CIT(A) against the AO’s order and argued that:
  • The assessee had a net interest income of INR 26,79,987/-. (Interest received INR 3,70,23,700/- and interest payment INR 3,43,43,713/-)
  • The Share Capital and Reserves & Surplus of the assessee were INR 28.53 crores which were far in excess of investments in shares which was at INR 5.10 crores.
  • Investment in shares included stock-in-trade and provisions of sec. 14A was not applicable in respect of stock-in-trade.
  •  In any case, without prejudice and even otherwise, the disallowance u/s 14A read with Rule 8D(2)(ii) could only be an investment in respect of those shares on which exempt dividend was received not in respect of other shares.
  • The CIT(A) rejected the assessee’s arguments and confirmed the AO’s addition of INR 21,74,843.
  • Hence, the assessee filed an appeal before the tribunal on the following grounds:
  • Disallowance of INR 21,74,843/- u/s 14A read with Rule 8D(2)(ii).
  • Not being allowed full and proper credit for TDS of INR 37,13,383/- despite all evidence being presented before the AO.
  • Not being allowed full and proper credit for advance tax payment of INR 20,00,000/- when all evidence in respect of such payment had been produced before the AO.
  • Not being allowed full and proper credit in respect of MAT payment u/s 115 JAA even when all the evidence in this regard were produced before the AO.
  • The assessee did not press the last three grounds of appeal and hence only the first ground pertaining to disallowance of INR 21,74,843 under Section 14A was discussed and decided by the Tribunal.

Revenue’s Arguments

A conjoint reading of Section 14A along with Rule 8D(2)(ii) warrants the disallowance of INR 21,74,843.

Assessee’s Arguments

  • The interest earned by the assessee during the year under consideration at INR 3,70,23,700/- was more than the interest paid amounting to INR 3,43,43,713/- and the net interest of INR 26,79,987/- earned by the assessee was shown as its income.
  • Netting of interest should be done and there being no interest expenditure claimed by the assessee after netting, the question of disallowance on account of interest under section 14A read with Rule 8D(2)(ii) would not arise.
  • The assessee relied on the Supreme Court decision of ACG Associated Capsules Pvt. Limited vs. CIT for the aforementioned contention. The ACG case laid down a principle in relation Section 80HHC: if profits are to be reduced by a percentage of interest, commission, etc earned by the assessee and ‘included in such profit’, then any interest, commission, etc. which are spent by the assessee and allowed as expenses, should be first netted off from such interest, commission, etc earned by the assessee.

Tribunal’s Judgement

  •  The tribunal observed that the assessee’s argument is duly supported by the judgment of the Gujarat High Court in Principal CIT vs Nirma Credit & Capital Pvt. Ltd. wherein it was held that for the purpose of applying Rule 8D(2)(ii) of the Income Tax Rules, 1962 (prior to amendment with effect from 02.06.2016), what would be considered as amount of expenditure by way of interest would be the interest paid by the assessee on the borrowings minus the taxable income earned during the financial year. In that case, the court pointed out unless netting of interest is not done, the legislative intent of Rule 8D(2)(ii) will not be fulfilled.
  • Relying on the aforementioned decision, the tribunal accepted the contention of the assessee that the interest earned by the assessee during the year under consideration being more than the interest paid, no disallowance on account of interest can be made under section 14A read with Rule 8D.
  • Tribunal ordered the deletion of the disallowance made by the AO.

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