2015 (1) TMI 1204 - AT - Income Tax

Disallowance u/s. 14A r.w. Rule 8D - Held that - No borrowed funds were utilized for earning the exempt income by the assessee and further the dividend were directly credited in the bank account of the assessee and no expenditure was claimed. What it may be, we find that the assessee only received ₹ 1,82,362/- as dividend income, therefore, there is no question of disallowance of ₹ 14,58.412/- by invoking section 14A r.w. Rule 8D under the facts available on record. It was also explained by the ld. counsel for the assessee that on identical fact in earlier years, no disallowance was made. In the present assessment year also, no borrowed funds were invested by the assessee for making investment in shares or for earning dividend income. At best, if any disallowance could be made that can be restricted to ₹ 1,485/- which were claimed as demat charges. Disallowance u/s 14A r.w. Rule 8D cannot exceed the exempt income. In view of this fact, we find merit in the claim of the assessee. - Decided in favour of assessee.

Issues:
1. Disallowance u/s 14A r.w. Rule 8D
2. Nexus of interest expenditure with earning exempt income
3. Applicability of Rule 8D in the case
4. Limitation on disallowance u/s 14A read with Rule 8D
5. Restriction of disallowance amount

Issue 1: Disallowance u/s 14A r.w. Rule 8D

The assessee challenged the disallowance of Rs. 14,58,112 under section 14A r.w. Rule 8D, arguing that no expenditure was incurred directly or indirectly for earning exempt income, and investments were made from own funds. The Tribunal noted that the dividend income was directly credited to the bank account without any claimed expenditure. It was held that since the assessee received only Rs. 1,82,262 as dividend income, the disallowance of Rs. 14,58,412 was unwarranted. The Tribunal emphasized that disallowance under Rule 8D cannot exceed the exempt income, and in this case, the disallowance was restricted to Rs. 1,485, representing demat charges.

Issue 2: Nexus of interest expenditure with earning exempt income

The assessee contended that the interest expenditure of Rs. 2,35,49,746 had no connection with earning exempt income as investments were made from own funds. The Tribunal observed that no borrowed funds were utilized for earning exempt income, and the dividend income was directly credited to the bank account. It was held that there was no basis for disallowing the interest expenditure under section 14A r.w. Rule 8D, supporting the assessee's argument.

Issue 3: Applicability of Rule 8D in the case

The Assessing Officer invoked section 14A r.w. Rule 8D for disallowance, alleging that various expenses related to exempt income were claimed in the profit & loss account. However, the Tribunal found that no borrowed funds were used for earning exempt income, and only a minimal amount of dividend income was received. The Tribunal concluded that Rule 8D was not applicable in this scenario, as there was no justification for the disallowance made by the Assessing Officer.

Issue 4: Limitation on disallowance u/s 14A read with Rule 8D

The Tribunal reiterated that disallowance under section 14A r.w. Rule 8D cannot exceed the exempt income. It was emphasized that the disallowance amount must be proportionate to the income earned, and in this case, the Tribunal restricted the disallowance to Rs. 1,485, aligning with the principles of the law.

Issue 5: Restriction of disallowance amount

The Tribunal, after considering the arguments presented by both sides, found merit in the assessee's claim and allowed the appeal. The order was pronounced in the open court in the presence of representatives from both parties, concluding the matter on 01/01/2015.

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