2015 (1) TMI 1223 - AT - Income Tax

Disallowance u/s 14A read along with rule 8D(2)(ii) - CIT(A) deleted the addition - Held that - When assessee is having own funds substantially in excess of its investment, it can always claim that the latter was made out of the former. A one-to-one relationship showing each sum going into the common kitty and going out therefrom, cannot be considered as an essential criteria for evaluating the nature of interest outgo. In a business environment, when assessee places all his money, whether from loans or from business operation in one kitty and makes investments therefrom, it can always argue that, like any normal businessman, its endeavour and intention was to use business loans for business purposes and own funds for investments. In the given case, assessee had shown that loans raised were for specific business purposes. It had suo motu made a disallowance for direct interest expenditure under rule 8D(2)(i) for A.Y. 2010-11, while claiming that no such expenditure was there for A.Y. 2009-10. For application of Section 14A(2), it is necessary for the AO to show that he is not satisfied with the correctness of the claim of assessee with regard to the expenditure claimed to have been incurred for earning exempt income. That this condition applies even where the claim is one of no or nil expenditure has been held by the Hon ble Delhi High Court in the case of Maxopp Investments Ltd. v. CIT, (2011 (11) TMI 267 - Delhi High Court). We are therefore of the opinion that ld. CIT(A) was justified in deleting the disallowances made under rule 8D(2)(ii). No interference is required. - Decided against revenue

Summary

Issues:
- Disallowances made under Section 14A of the Income-tax Act, 1961 with respect to exempt income from shares investments.

Analysis:
1. The appeals were filed by the revenue against the orders of the CIT(Appeals)-I, Bangalore for the assessment years 2009-10 and 2010-11. The grievance raised by the revenue was regarding the deletion of disallowances made by the AO under Section 14A of the Income-tax Act, 1961, read along with rule 8D(2)(ii) by the CIT(A).

2. The assessee had investments in shares generating dividend income in the respective years. The AO applied Rule 8D(2)(ii) for working out the interest expenditure not directly attributable to any particular income and Rule 8D(2)(iii) for indirect expenditure. The disallowances made by the AO were challenged by the assessee before the CIT(A).

3. The CIT(A) analyzed the loans taken by the assessee and found that a significant portion of the interest cost was on loans taken for specific business purposes. After excluding certain amounts like TDS interest and bank charges, the CIT(A) directed the AO to consider revised base figures for working out the disallowance under rule 8D(2)(ii) for the respective years. The disallowance under rule 8D(2)(iii) was left unchanged by the CIT(A).

4. The revenue, represented by the ld. DR, contested the CIT(A)'s orders, arguing that the mode of utilization of loans was presumed and the investments could have loan components. The assessee, represented by the ld. AR, maintained that the loans were for specific purposes and disallowances were made based on presumptions.

5. Upon review, the Tribunal observed that the assessee had substantial own funds in excess of the investments in shares. The Tribunal noted that the loans raised were for specific business purposes and that the assessee had made a suo motu disallowance for direct interest expenditure for one of the assessment years. The Tribunal referred to the necessity for the AO to be unsatisfied with the correctness of the claim of the assessee regarding expenditure for earning exempt income, as per the judgment of the Hon'ble Delhi High Court in the case of Maxopp Investments Ltd. v. CIT.

6. The Tribunal concluded that the CIT(A) was justified in deleting the disallowances made under rule 8D(2)(ii) and upheld the decision. The cross objections of the assessee were also supportive of the CIT(A)'s order. Consequently, both the appeals of the Revenue and the Cross Objection of the assessee were dismissed by the Tribunal.