2013 (1) TMI 798 - AT - Income Tax

Summary

Issues involved: Appeal against order of CIT(A) for assessment year 2008-09 regarding disallowance u/s 14A of IT Act and exempt income u/s 10(34)/(35).

Dispute over disallowance u/s 14A:
The appellant, a company engaged in manufacturing and trading of Fine Chemicals, contested the disallowance of &8377; 11,93,964 u/s 14A of the Act for the assessment year 2008-09. The appellant argued that the investment in Mutual Fund generating exempt income was from retained profits, not borrowed funds, and there was no nexus between interest expenditure and the investment amount. The AR presented financial data showing an increase in own funds and profit exceeding the investment in mutual funds, indicating no use of borrowed funds for investments. The Tribunal referred to Rule 8D of IT Rules, 1962, and the judgment of the Hon'ble Bombay High Court in Reliance Utilities and Power Ltd. Vs CIT, 313 ITR 340, which held that if own funds exceed investments, such investments are from own funds. Consequently, the disallowance of interest expenditure was deleted.

Other expenses disallowance:
Regarding the balance disallowance of &8377; 42,790 for other expenses, the Tribunal found it justified as the appellant failed to provide evidence of expenses incurred for earning business income. The AR's argument that no actual expenses were incurred was dismissed, citing the need for expenses related to managing investments in mutual funds, including account maintenance and decision-making costs. The disallowance was upheld as per Rule 8D.

Comparison with Tribunal's decision:
The Tribunal distinguished the present case from the decision in Kamal Madmohan Mangaldas Vs ITO, where non-taxable income was in the personal profit & loss account with no claimed expenses. In contrast, the appellant's dividend income was reflected in the company's profit & loss account, making the cited decision inapplicable. Ground No.2 of the appeal was partly allowed based on this distinction.

Conclusion:
The appeal was partly allowed, with the disallowance of interest expenditure u/s 14A deleted but the disallowance of other expenses upheld. Ground No.3 was rejected as it mirrored the issue addressed in Ground No.2. The order was pronounced on 31-01-2013.