2015 (3) TMI 1113 - AT - Income Tax

Addition u/s 14A - CIT(a) deleted the addition in part - Held that - There is no common interest expenditure in the present case as per the uncontroverted submissions of the assessee, no portion of interest really survives for allocation under rule 8D(2)(ii). However, as the ld. CIT(A) has given partial relief and the assessee is not in appeal against the same, all we can hold is that the relief granted by the ld. CIT(A) does not need to be disturbed at the instance of the revenue. We thus decline to interfere in the matter in this appeal by the Assessing Officer. - Decided against revenue

Issues Involved:
1. Applicability of Rule 8D for Assessment Year 2008-09.
2. Determination of disallowance under Section 14A of the Income Tax Act, 1961.
3. Calculation of interest expenditure attributable to exempt income.

Issue-wise Detailed Analysis:

1. Applicability of Rule 8D for Assessment Year 2008-09:
The Assessing Officer (AO) contended that Rule 8D is applicable from the Assessment Year (A.Y.) 2008-09 and cited the Supreme Court's decision in CIT vs. United General Trust, 200 ITR 488 (SC), to support the disallowance of administrative and interest expenses related to earning exempt dividend income. The AO argued that the invocation of Section 14A is automatic upon claiming dividend as exempt, and Rule 8D provides the method for determining the amount of expenditure in relation to income not forming part of total income.

2. Determination of Disallowance under Section 14A of the Income Tax Act, 1961:
During the scrutiny assessment, the AO noticed that the assessee earned dividend income of Rs. 89,02,540, out of which Rs. 68,44,790 was claimed as exempt under Section 10(34). The AO computed a disallowance of Rs. 2,79,02,402 under Section 14A, applying Rule 8D, which was added to the total taxable income of the assessee. The AO's computation included:
- Interest expenditure not directly attributable to any particular income.
- Average value of investments related to exempt income.
- Average value of total assets.
- Disallowance calculated as per Rule 8D.

3. Calculation of Interest Expenditure Attributable to Exempt Income:
The assessee contended that the interest expenditure attributable to earning the dividend income should be Rs. 83,90,178, not Rs. 5,52,83,131 as adopted by the AO. The CIT(A) found the AO's disallowance of Rs. 2,79,02,402 for earning exempt income of Rs. 68,44,790 to be an absurdity. The CIT(A) recalculated the disallowance and confirmed it to the extent of Rs. 30,26,552, providing partial relief to the assessee.

Tribunal's Findings:
The Tribunal noted that the primary dispute was the definition of variable 8D(2)(ii)(A). The AO adopted this variable as Rs. 5,52,83,131, while the CIT(A) adopted it as Rs. 83,90,178. The Tribunal emphasized that Rule 8D(2)(ii) should allocate common interest expenses not directly attributable to any particular income. The Tribunal referred to the case of ACIT vs. Champion Commercial Co. Ltd. (139 ITD 108), which highlighted the incongruity in Rule 8D(2)(ii) and the need to exclude interest directly related to both tax-exempt and taxable income.

The Tribunal concluded that there was no common interest expenditure in the present case, as per the uncontroverted submissions of the assessee. Therefore, no portion of interest survived for allocation under Rule 8D(2)(ii). The Tribunal upheld the partial relief granted by the CIT(A) and declined to interfere with the AO's appeal.

Conclusion:
The Tribunal confirmed the relief granted by the CIT(A) and dismissed the appeal filed by the AO. The disallowance under Section 14A was recalculated, and the partial relief provided by the CIT(A) was upheld, emphasizing the correct application of Rule 8D and the exclusion of interest directly attributable to taxable income. The judgment was pronounced in the open court on 23rd March, 2015.

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