2014 (4) TMI 1081 - AT - Income Tax

Disallowance u/s 14A - Held that - Find force in the contention of assessee that the interest has been wrongly taken as the assessee has sufficient interest-free funds available hence the addition made on account of interest amounting to 1, 37, 060/- is hereby directed to be deleted. In respect of the disallowance towards administrative expenses since both the authorities below have not given finding as to whether the % of average investment is of those investments wherefrom the assessee has earned exempt income. As per the provision of Rule 8D it is only the average of the value of the investment from which the income has been earned which is not falling within the part of total income that is to be considered. Thus it is not the total investment at the beginning of the year and at the end of year which is to be considered but it is the average of the value of the investment which has given rise to the income which does not form part of total income is to be considered. Hence the issue is restored back to the file of AO to verify as to how much investment was made during the year on which the assessee has earned exempt income and accordingly re-compute the disallowance under Rule 8D of the Income Tax Rules 1962. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Disallowance made under section 14A of the Income Tax Act.
2. Application of Rule 8D of the Income Tax Rules, 1962.
3. Consideration of interest-free funds for investment.
4. Disallowance of administrative expenses.

Analysis:

1. Disallowance under Section 14A:
The appeal was against the order of the Commissioner of Income Tax(Appeals) confirming the disallowance of Rs. 14,16,572 under section 14A of the Income Tax Act. The Appellant argued that no disallowance was warranted under section 14A. The Appellant contended that the authorities failed to consider that the Assessee had earned exempt income of Rs. 11,67,949 and that no borrowed capital was utilized for investments.

2. Application of Rule 8D:
The Assessing Officer made the disallowance under section 14A by invoking Rule 8D of the Income Tax Rules, 1962. The Appellant challenged the invocation of Rule 8D, stating that there were sufficient interest-free funds available for investments. The Appellant relied on the balance-sheet to support this claim, highlighting the significant share capital and reserves compared to loans. The Appellant argued that the presumption should be that investments were made from own funds if there were sufficient interest-free funds.

3. Consideration of Interest-Free Funds:
The Appellant emphasized that interest was wrongly considered, given the availability of interest-free funds. The Tribunal directed the deletion of the addition made on account of interest. The argument was supported by the Appellant's assertion that sufficient interest-free funds were present for investments, leading to the deletion of the interest-related disallowance.

4. Disallowance of Administrative Expenses:
Regarding the disallowance of administrative expenses, the Appellant contended that the authorities had not correctly determined which investments generated exempt income. The Tribunal noted that only the average value of investments generating income not forming part of the total income should be considered for disallowance. Consequently, the issue was remanded to the Assessing Officer to re-compute the disallowance under Rule 8D based on investments that generated exempt income.

In conclusion, the appeal was partly allowed for statistical purposes, with specific directions given for re-computation of disallowances under Rule 8D. Grounds 2 and 3 were deemed general and required no separate adjudication. The decision highlighted the importance of considering interest-free funds for investments and the correct application of rules for disallowances under section 14A.