ITAT Quashes Rs 69.48 Cr Addition under Section 14A Disallowance for Lack of AO’s Satisfaction & Ample Own Funds

The assessee, engaged in selling advertising space and related services, had earned Rs. 36.21 crore exempt income from investments in a company and made a suo motu disallowance of Rs. 8.21 crore under Rule 8D(2)(iii). The Assessing Officer, without recording dissatisfaction as required under Section 14A(2), invoked Rule 8D(2)(ii) to increase the disallowance to Rs. 77.69 crore.

The assessee explained that 13.08 crore shares were acquired via amalgamation at nil cost, 9.62 crore shares were received as gifts from group concerns, and 1.42 crore shares were purchased for 176.47 crore from interest-free loans provided by Edison Continental Laboratories Pvt. Ltd. Financials showed own funds of 951 crore, far exceeding investments of 176 crore. No interest-bearing funds were used.

Issue Raised: Whether the Section 14A disallowance under Rule 8D(2)(ii) and the MAT adjustment are correct when the assessee’s funds exceed investments and no borrowed funds are used to acquire income-generating assets that are exempt under income tax.

ITAT’s Decision: The Tribunal upheld the deletion of disallowance made by CIT(A), as similar issues in AYs 2014-15 and 2015-16 were decided in the assessee’s favour. The Hon’ble ITAT also relied upon CIT v. HDFC Bank Ltd. (Bom HC) and South Indian Bank Ltd. v. CIT (SC) decision to say that where own funds exceed investments, a presumption arises that investments are from such funds, removing the need for interest disallowance under Section 14A. The addition is invalidated also due to AO’s failure to record dissatisfaction under Section 14A(2) before invoking Rule 8D(2)(ii).

The ITAT affirmed the deletion of the Section 14A disallowance under both normal provisions and Section 115JB computation upon no contrary evidence from the Revenue. So, the appeal herein was dismissed.

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