2014 (3) TMI 963 - AT - Income Tax

Disallowance u/s 14A - CIT(A) restricted part disallowance - Held that - CIT(A) examined the facts of the case in the light of section 14A of I.T. Act read with Rule 8D and decisions of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT and Max Opp. Investment Ltd. vs. CIT 2011 (11) TMI 267 - Delhi High Court . CIT(A) accepted the contention of the assessee that term loan on which interest was paid, was taken after F.Y. 31/03/1999. The shares were acquired in F.Y. 1998- 99, thus, the term loan was nil as on 31/03/1999. It was, therefore, found that the interest paid on the term loan is clearly not related to the exempt income. Therefore, the amount as per Rule 8D(2) would be nil. These findings of fact recorded by ld. CIT(A) have not been challenged and rebutted through any material on record. Therefore, ld. CIT(A) was justified in deleting the addition of ₹ 12,77,835/-. The decisions cited by ld. DR thus, would not support the case of the Revenue in any manner. The Departmental appeal thus, has no merit and is, accordingly, dismissed. Similarly, assessee has not been able to demonstrate before us as to how the disallowance confirmed by ld. CIT(A) in a sum of ₹ 1,43,479/- was not sustainable. - Decided against asssessee and revenue in part.

Summary

Issues Involved:
1. Disallowance of interest under Rule 8D read with Section 14A of the Income Tax Act.
2. Validity of the addition sustained by the CIT(A) in the sum of Rs. 1,43,479/- on the same issue.

Issue-wise Detailed Analysis:

1. Disallowance of Interest under Rule 8D read with Section 14A of the Income Tax Act:

The Revenue challenged the CIT(A)'s decision to hold that the disallowance of interest amounting to Rs. 12,77,835/- under Rule 8D read with Section 14A of the Income Tax Act was not warranted. The assessee, on the other hand, contested the partial addition sustained by the CIT(A) amounting to Rs. 1,43,479/- on the same issue.

The AO noted from the audited accounts that the assessee earned dividend income of Rs. 75,000/- and Rs. 41,40,888/- which were claimed as exempt from tax. However, no expenditure incurred in relation to this exempt income was deducted. The assessee did not provide any explanation but confirmed the dividend earnings. The AO found that the assessee had taken loans amounting to Rs. 76,23,53,929/- and could not demonstrate that none of the loan funds were used for making investments. Consequently, the AO disallowed Rs. 14,21,311/- under Section 14A read with Rule 8D.

The CIT(A) restricted the disallowance to Rs. 1,43,479/-, considering the assessee's submission that investments in shares were made in earlier years out of surplus profits and reserves, not from interest-bearing loans. The CIT(A) referred to the Delhi High Court decision in Maxopp Investment Ltd. vs. CIT, which emphasized that the AO must record dissatisfaction with the assessee's claim before determining the disallowance amount under Rule 8D.

The CIT(A) found that the term loan on which interest was paid was taken after FY 31/03/1999, while the shares were acquired in FY 1998-99, indicating that the interest paid on the term loan was not related to the exempt income. Thus, the disallowance under Rule 8D(2) was nil, confirming only Rs. 1,43,479/- as per Rule 8D(2)(iii).

2. Validity of the Addition Sustained by the CIT(A) in the Sum of Rs. 1,43,479/-:

The Revenue's appeal was dismissed as the CIT(A)'s findings were based on facts that were not rebutted by any material evidence. The CIT(A) had correctly applied the principles laid down in the decisions of the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT and the Delhi High Court in Maxopp Investment Ltd. vs. CIT.

Similarly, the assessee's appeal was dismissed as they failed to demonstrate how the disallowance confirmed by the CIT(A) in the sum of Rs. 1,43,479/- was not sustainable. The AO had recorded that the assessee did not furnish any explanation regarding the expenditure incurred in relation to the exempt income. Therefore, the calculation made by the AO for disallowance under Section 14A read with Rule 8D was justified.

Conclusion:
Both cross appeals were dismissed. The CIT(A)'s order restricting the disallowance to Rs. 1,43,479/- was upheld, and the Revenue's appeal against the deletion of Rs. 12,77,835/- was dismissed. The assessee's appeal against the sustained disallowance of Rs. 1,43,479/- was also dismissed. The judgment emphasized the necessity for the AO to record dissatisfaction with the assessee's claim before determining disallowance under Rule 8D.