2012 (3) TMI 421 - AT - Income Tax

Disallowance u/s. 14A - Held that - Once there is no net interest expenditure as is the case before us upon setting off interest credited to profit and loss account no part of interest debited can be disallowed as attributable to earning tax free dividend. The CIT(A) was thus quite justified in deleting the interest disallowance. We have also noted that entire expenses incurred by the assessee have been offered for disallowance and once that happen nothing remains for further disallowance u/s. 14A. The disallowance under section 14A can come into play only out of expenses claimed for deduction and expenses have been claimed for deduct ion there cannot be any disallowance either. The conclusions arrived at by the CIT(A) are therefore correct and admit no interference by us. We approve and confirm the order of the CIT(A).

Summary

Issues:
Challenge to correctness of CIT(A)'s order under section 143(3) of the Income Tax Act, 1961 for the assessment year 2008-09 regarding disallowance under rule 8D(2)(ii) and rule 8D(2)(iii).

Analysis:
1. The Assessing Officer appealed against the CIT(A)'s order concerning the disallowance under rule 8D(2)(ii) and rule 8D(2)(iii) of the Income Tax Act, 1961 for the assessment year 2008-09. The AO contended that the CIT(A) erred in law by deleting the disallowance of certain amounts without proper justification. Specifically, the AO challenged the deletion of a disallowance of &8377; 9,86,306 under rule 8D(2)(ii) and &8377; 19,14,503 under rule 8D(2)(iii).

2. During the assessment proceedings, it was observed that the assessee earned tax-exempt dividend income but offered only a portion for disallowance under section 14A. The AO disallowed certain amounts based on Rule 8D calculations. However, the CIT(A) found that there was no net interest expenditure after setting off interest income, leading to the reversal of the AO's disallowance. The CIT(A) reasoned that once all expenses were disallowed, no further disallowance could be made under Rule 8D.

3. The Tribunal analyzed the contentions, reviewed the evidence, and considered the legal provisions. It was established that in cases where there is no net interest expenditure after adjusting interest income, no part of the interest debited can be disallowed for earning tax-free dividends. Additionally, since the entire expenses were already offered for disallowance, there was no basis for further disallowance under section 14A. Therefore, the Tribunal affirmed the CIT(A)'s decision, concluding that the disallowance made by the AO was unwarranted.

4. Ultimately, the Tribunal dismissed the appeal, upholding the CIT(A)'s order and confirming that once all expenses are disallowed and there is no net interest expenditure, no further disallowance can be made under section 14A. The judgment was pronounced on March 30, 2012, by the Tribunal in Kolkata.