ACIT vs. Punj Lloyd Ltd: Appeal Dismissed Regarding Section 14A Disallowance for AY 2015-16

ACIT vs. Punj Lloyd Ltd: Appeal Dismissed Regarding Section 14A Disallowance for AY 2015-16

Case Number: ITA 6562/DEL/2019
Assessment Year: 2015-16
Filed Date: 2019-08-07
Order Date: 2023-10-30
Pronounced On: 2023-10-30

Background:

The appeal was filed by the Additional Commissioner of Income Tax (ACIT), Central Circle-26, New Delhi, against Punj Lloyd Ltd., a prominent engineering and construction company based in New Delhi. The dispute pertained to the assessment year 2015-16, with the core issue being the disallowance of Rs. 10,47,30,878/- under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules.

Why the Case Was Filed:

The Revenue filed the appeal challenging the order dated 04.06.2019 by the Commissioner of Income Tax (Appeals)-29, New Delhi [CIT(A)], which deleted the disallowance made by the Assessing Officer (AO) under Section 14A. The AO had added the disallowance on the grounds that the assessee failed to establish the nexus between interest-free funds and investments that yield exempt income.

Tribunal’s Findings:

1. Section 14A Disallowance:

The Assessing Officer had invoked Section 14A to disallow the expenditure claimed by Punj Lloyd Ltd. The AO argued that the company had made substantial investments in subsidiaries and other entities, from which dividend income (exempt under tax laws) was expected. Despite no exempt income being earned during the year, the AO proceeded with the disallowance, assuming that the provisions of Section 14A and Rule 8D applied mandatorily.

2. CIT(A)’s Order:

The CIT(A) overturned the AO’s decision, noting that Punj Lloyd Ltd. had sufficient interest-free funds to make the investments in question. The CIT(A) cited various case laws, including the landmark decision by the Bombay High Court in Commissioner of Income Tax vs. Reliance Utilities & Power Limited, which held that when an assessee has both interest-free funds and borrowed funds, the presumption is that the investments are made from interest-free funds.

3. Revenue’s Appeal and Tribunal’s Decision:

The Revenue challenged the CIT(A)’s order, arguing that the CIT(A)’s findings were contrary to the principles laid down under Rule 8D(ii) and (iii) of the Income Tax Rules. However, the Tribunal, comprising Dr. BRR Kumar (Accountant Member) and Ms. Astha Chandra (Judicial Member), dismissed the appeal, noting several key points:

• The AO did not record any dissatisfaction with the suo motu disallowance made by the assessee under Section 14A. This failure to record dissatisfaction is a prerequisite for invoking Rule 8D, as emphasized in several judgments, including Pr. CIT vs. Keshav Power Ltd. (Delhi High Court).
• The Tribunal observed that the CIT(A)’s finding that sufficient own funds were available with the assessee to make the investments was not contested effectively by the Revenue.
• The Tribunal cited the Supreme Court’s decision in South Indian Bank Ltd. vs. CIT, which reinforced the principle that if the assessee has sufficient interest-free funds, it is presumed that the investments were made from these funds, nullifying the need for disallowance under Section 14A.

Conclusion:

The Tribunal upheld the CIT(A)’s order, concluding that the disallowance under Section 14A was unwarranted in this case. The Revenue’s appeal was dismissed, reaffirming the principle that disallowance under Section 14A cannot be made without proper satisfaction recorded by the AO and when sufficient interest-free funds are available.

Order Pronounced in Open Court: 30th October 2023

Bench: Dr. BRR Kumar, Accountant Member, and Ms. Astha Chandra, Judicial Member

ACIT vs. Punj Lloyd Ltd: Appeal Dismissed Regarding Section 14A Disallowance for AY 2015-16