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Judgment
PER VIMAL KUMAR, JM:
The appeal filed by the assessee is against order dated 21.07.2025 of the Ld. Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as “Ld. CIT(A)”), u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), arising out of assessment order dated 27.09.2022 of the Ld. Assessing Officer/Assessment Unit ,(hereinafter referred to as “Ld. AO”), u/s 143(3) r.w.s. 144B of the Act for Assessment Year 2020-21.
Brief facts of the case are that, assessee filed return of income on 12.02.2021 showing total income of Rs.65,79,72,210/-. The case was selected for complete scrutiny. Notice u/s 143(2) dated 29.06.2021, notices u/s 142(1) dated 25.10.2021, 18.12.2022 and 22.07.2022 and show cause notices dated 24.08.2022 and 30.08.2022 were issued. The assessee filed submissions electronically through ITBA Portal.
On completion of proceedings Ld. AO vide order dated 27.09.2022 made additions of Rs.1,32,72,045/- for disallowing expenditure and Rs.38,92,928/- by adding gratuity.
Against order dated 27.09.2022 of Ld. AO, the assessee filed appeal before Ld. CIT(A) which was partly allowed for statistical purposes.
Being aggrieved, appellant-assessee preferred present appeal on following grounds:-
1.That on the facts and circumstances of the case, assessment order passed under Section 143(3) read with Section 144B of the Act as sustained by the Ld. CIT(A) is bad in law, illegal and void ab initio;
2.That on the facts and circumstances of the case, notice issued under Section 143(2) of the Act, is bad in law, illegal and void ab initio;
3.That on the facts and circumstances of the case and in law, the Ld. CIT(A) and Ld. AO grossly erred in working out a disallowance of Rs.1,87,46,045/- under section 14A as against the disallowance of Rs. 54,74,000/- made by the appellant under section 14A in the return of income
4.That in the facts and circumstances of the case and in law, the Ld. CIT(A) and by the Ld. AO erred in making addition of Rs. 38,92,928/- towards provision of Gratuity;
5.That on the facts and circumstances of the case and in law, the Ld. AO and Ld. CIT(A) grossly erred in adopting the income assessed under Section 143(1) of the Act at Rs. 68,12,07,950/- as against the returned income of Rs. 65,79,72,210/-;
5.1.That on the facts and circumstances of the case, no intimation under Section 143(1) of the Act was ever issued and served upon the assessee;
6.That the penalty proceedings initiated under Section 270A read with section 274 of the Act is incorrect, illegal and bad in law;
Ld. Authorized Representative for the appellant-assessee submitted that, Ld. CIT(A) erred in upholding action of Ld. AO in disallowing expenses u/s 14A in the return of income. The case of the assessee was covered by order dated 27.06.2022 in assessee’s own case in ITA No.2808/Del/2018 titled as Additional Commissioner of Income Tax Vs. M/s Tourism Finance Corporation of India for AY 2011-12.
Ld. Authorized Representative for the appellant-assessee submitted that, Ld. CIT(A) erred in confirming addition of Rs.38,92,928/- towards provision of gratuity. Assessee had created fund for gratuity. Assessee was not issued notice u/s 143(1), screenshot is at page No.61 of Paper Book. So notice u/s 143(2) dated 29.06.2021 is illegal.
Hon’ble Supreme Court of India in Commissioner of Income Tax Vs. Gujarat Electricity Board in para No.5 held as under:-
5.Even otherwise, the view taken by the Gujarat High Court seems to be correct on principle. There is no dispute that section 143(1)(a) of the Act enacts a summary procedure for quick collection of tax and quick refunds. Under the scheme if there is a serious objection to any of the orders made by the Assessing Officer determining the income, it is open to the assessee to ask for rectification under section 154. Apart therefrom, the provisions of section 143(1)(a)(i) indicate that the intimation sent under section 143(1)(a) shall be without prejudice to the provisions of sub-section (2). The Legislature, therefore, intended that, where the summary procedure under sub-section (1) has been adopted, there should be scope available for the revenue, either suo motu or at the instance of the assessee to make a regular assessment under sub-section (2) of section 143. The converse is not available; a regular assessment proceeding having been commenced under section 143(2), there is no need for a summary proceeding under section 143(1)(a).
Ld. Departmental Representative submitted that, Ld. CIT(A) in order dated 21.07.2025 held that:-
“In view of the above, the appeal is partly allowed for statistical purposes. Grounds relating to disallowance under section 14A, addition under section 43B, and initiation of penalty proceedings are dismissed. Grounds concerning the denial of DDT credit and levy of consequential interest under section 115P, as well as the computational discrepancy in the assessed income, are allowed solely for the purpose of verification and correction by the Assessing Officer. Grounds of a general nature do not require adjudication. The Assessing Officer is directed to take necessary action in accordance with the directions contained in this order.”
From examination of record, in light of aforesaid rival contention, it is crystal clear that, Ld. CIT(A) upheld addition of Rs.1,32,72,045/- on account of disallowance u/s 14A of the Act.
A coordinate Bench in ITA No.2808/Del/2018 titled as Additional Commissioner of Income Tax Vs. M/s Tourism Finance Corporation of India for AY 2011-12 in order dated 27.06.2022 in para Nos.7 to 12 held as under:-
7.The AO observed that during the year under consideration, the assessee has incurred interest of Rs. 41,63,85,365/-, The AO recorded satisfaction for disallowance u/s 14A of the Act, r/w Rule 8D of the Rules with following remarks:
"Since, the assessee company has invested its money for such huge investments in shares, mutual funds etc., which is capable to generate income which does not or shall not form part of total income of the assessee company and indirect cost in the form of administrative nexus between the exempted income, which the investments shall generate and the expenditures directly or indirectly involved in earning the said income. I am not satisfied with the method of computation of disallowance worked out by the assessee himself as per the provisions of Section 14A, hence, I am recording reasons to arrive at satisfaction for disallowance u/s 14A of the Act, r/w Rule BD of the Rules."
8.Accordingly, the AO made disallowance of Rs. 4,52,06,920/- u/s 14A of the Act, r/w Rule 8D of the Rules as worked out as under:-
Particulars Amount (Rs.) Amount directly relatable to dividend income Nil Interest expenditure relatable to such income 4,13,39,546/-(41,63,85,365 X 77,34,74,853/7790690542) One-half percent of average value of investment 38,67,374/-(0.5% 77,34,74,853) Total quantum of disallowance: 4,52,06,920/-
9.While working the above disallowance, the AO has taken the amount of interest expenditure at Rs. 41,63,85,365/, the amount of average investment at Rs. 77,14,74,853/ and the amount of average total assets (as appearing in the balance sheet) Rs. 7790690542/-
10.Snippets of the order of the Ld.CIT(A): Rule 8Dof the IT rules, relevant to the expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts. namely: -(i) the amount of expenditure directly relating to Income which does not form part of total income, (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely = A x B/C Where A amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; B the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;
C the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;
an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year.
The appellant submitted that the loans taken by the appellant by issuance of bonds etc. are for its business of lending for tourism and infrastructure projects and therefore, no interest bearing funds have been invested in shares/mutual funds.
The appellant submitted detailed chart showing the position of merits, Reserve, Loans position, Profit, Fixed Assets, Cash Flow on yearly to showcase that it has not used interest bearing funds in making investments which result in income not chargeable to tax.
Further, the appellant pointed out that during the FY 2010-11 (relevant to AY 2011-12), assessee has earned interest income on loans amounting to Rs. 96,27,81,720/- and on deposits for Rs. 5,31,63,523/-(Refer Schedule-J to the Accounts) whereas, the interest expenses on borrowings for the year stands at Rs. 41,63,85,365/. Therefore, the appellant contended that it has earned net interest income during the year and on net basis, no interest expenditure has been incurred. It is noted that the assessee was earning net positive interest income which indicates that own funds of the assessee exceeded Interest bearing funds.
Further, the appellant invited attention to the fact that in Assessment Year 2012-13, the learned Assessing Officer, Circle-25(2), New Delhi has, after examining the audited accounts since the inception of the company and other details, given a clear finding in his order u/s 143(3) dated 25-02-2015 that upto the assessment year 2011-12 the assessee has not used any interest bearing funds in investments which give income not chargeable to tax.
Further, it is noted that AO has also not made any disallowance based on the first limb of Rule 8D which provides for disallowance of interest expenses directly attributable to the earning of dividend income. Further, the AO made disallowance of Rs.4,13,39,546/- and Rs.38,67,374/- under the second limb & third limb of Rule 8D respectively.
The AO justified the disallowance under second limb because of the fact that interest bearing funds are part of funds available with the assessee for investment in the assets, I mid that there can be 4 scenarios of nexus between the borrowed funds and investments which are as under;
An assessee has sufficient interest free funds for the investments yielding exempt income.
An assessee has sufficient interest free funds for the Investments, however, has also borrowed funds for capital expenses, working capital, etc.
Investments are made through a common pool of borrowed and own funds, Direct nexus, investment made out of borrowed funds.
In the present case, it is on record that the assessee has sufficient interest free funds for the Investments, however, the assessee has also borrowed funds for capital expenses, working capital, etc. It may be worth mentioning that the assessee has failed to showcase the exact date wise details of sourcing of fund for investment out of non-interest bearing funds from its books of accounts. However, it remains an admitted fact that sufficient interest free funds were available with the assessee company.
The exact details of source of funds are very critical to establish the direct linkage of investment with the interest bearing funds. However, it is a settled position that if own funds of the appellant exceed the borrowed funds and further, the non-interest bearing funds exceed the amount of investment yielding exempt income, in such a situation, the disallowance under second limb is not justified.
It may be relevant to take note of the decision of Income Tax Appellate Tribunal Delhi in the case of T & T Motors Ltd., DLF and Oriental Bank of Commerce Ltd. which followed the ratio decidendi down in the case of Hon'ble Bombay High Court in CIT vs. HDFC Bank Ltd. (201)4) 366 ITR 505 (Bom), the disallowance made by the AO under second limb of Rule 8D is not appropriate. The relevant extracts in this regard are as under "Where assessee's capital, profit reserves, etc., were Higher than the investment in tax free securities, it would have to be presumed that the investment made by the assessee would be out of interest free funds available with the assessee and, consequently, no disallowance could be made u/s 14A of the Act. In view of the fact that the assessee's share capital with reserves and surpluses is far m excess of the amount invested in securities fetching exempt income, there can be no question of disallowance of interest amounting to '8,22,725/-. The disallowance to this extent is deleted."
Regarding the disallowance made under third limb of Rule 8D, the appellant claimed that the AO, instead of adopting the average value of investment of which income is not part of the total income i.e. the value of tax exempt investment, wrongly chose to factor in the total investment itself.
As regards the disallowance by way of 0.5% of average Investments is concerned, the Hon'ble Delhi High Court in the case of ACB India Ltd. vs. ACIT in ITA No. 615/2014 vide order dated 24-03-2015 held that only the investment yielding non-taxable income have to be considered for working out disallowance u/s 14A and not all the investments. Accordingly taking into account the decision of Hon'ble Delhi High Court in the case of ACB India Ltd., the AO is directed to re-compute the disallowance under third limb of Rule 8D after taking the amount of investments of Rs.14,07,86,852/- in place of total investment of Rs.77,34,74,853/. The disallowance under third limb of Rule 8D works out to Rs.7,03,934/-. Since the assessee has suo-moto disallowed Rs. 1,00,000/- in its commutation as disallowance u/s 14A, therefore, the AO is directed to restrict the net disallowance at Rs. 6,03,934/-.
We have gone through the bare facts on record.
The assessee is found to be having sufficient own funds which exceed the borrowed funds. The availability of non-interest bearing funds exceed the amount of investment yielding exempt income. Ergo, we here by affirm the reasoned and well analysed order of the Ld.CIT(A)
In view of above material facts of availability of non-interest bearing funds exceeding amount of investment yielding exempt income and by following the judicial precedent the action of Ld. AO in working out disallowance of Rs.1,32,72,045/- u/s 14A being unsustainable, is set aside.
Ground of appeal No.3 is accepted.
Regarding addition of Rs.38,92,928/- towards gratuity, Ld. CIT(A) had directed AO to verify and re-compute of the interest amount. The assessee had made a provision of Rs. 48,00,718/- towards Gratuity for the year ended 31.03.2020. Out of this, it paid Rs. 9,07,790/- on 21.11.2020 leaving a balance of Rs. 38,92,928/-.
The assessee had a prepaid balance of Rs. 33,14,121/- from the Financial Year 2018-19 (Assessment Year 2019-20) as per the actuarial valuation and balance sheet. This has also been treated as discharge of liability for the year under consideration i.e. Assessment Year 2020-21 and adjusted there against.
Thus only a balance of Rs. 5,78,807/- remained unpaid which could be disallowed.
In Para 5.4 of the order, the learned Assessing Officer refers to amendment in Section 43 to not allow the pre-paid gratuity of Rs. 33,14,121/-. It is submitted that Section 43 deals with "Definition of certain terms relevant to income from profits and gains of business or profession", and thus the addition has been made on a wrong premise.
The Explanation-1 quoted by the Assessing Officer is for Section 43B. The Officer has wrongly stated that this amendment is from AY 2021-22 and is clarificatory.
As a matter of fact, plain reading of the explanation means that the explanation is applicable to assessment year 1983-84 and earlier years.
Copies of the receipts for payment of Rs. 9,07,790/- (7,77,790 + 1,30,000), alongwith ledger account of prepaid gratuity; Actuarial Valuation Report dated 26.04.2019 showing the excess balance of Rs. 33,14,121/-; and Note No. 40 to the audited accounts for the year ended 31.03.2019 are submitted herewith.
The Assessee has neither claimed nor has been allowed the deduction of excess payment of Gratuity of Rs. 33,14,121/- in the earlier assessment year.
In view of the above, the addition towards Provision of Gratuity may kindly be restricted to Rs. 5,78,807/- thereby allowing a relief of Rs. 33,14,121/-.
Perusal of above documents shows that audited accounts were submitted by the assessee which reflect deduction of excess payment of gratuity in the earlier assessment years. Therefore, the action of Ld. CIT(A) in directing Ld. AO to verify and re-compute is sustainable.
Ground of Appeal No.4 is rejected.
Ground of Appeal Nos.1, 2, 5 and 6 being academic in nature are left open.
In the result, the appeal of the assessee is partly allowed.