2013 (3) TMI 667 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - Held that - No part of interest can be considered to have been incurred towards investment fetching exempt income. Once there is no deduction for interest expenditure in this regard, there cannot be any question of making any disallowance u/s 14A. We, therefore, order for the deletion of addition u/s 14A to the extent of ₹ 59.79 lakh on account of interest in relation to investment in tax free bonds. Working out disallowance u/s 14A - as per assessee AO also included the amount invested by the assessee in share capital of certain firms, interest from which was offered for taxation - Held that - Special Bench of the Tribunal in the case of Vishnu Anand Mahajan v. ACIT 2012 (6) TMI 297 - ITAT, Ahmedabad has discussed the issue when there is receipt of interest from the firm chargeable to tax and share in the profits which is exempt. In this order the Special Bench has laid down a mechanism for working out the disallowance u/s 14A. The Assessing Officer is directed to work out the second part of disallowance as per Rule 8D afresh in the light of the afore-noted order of the Special Bench after allowing a reasonable opportunity of being heard to the assessee.

Summary

Issues Involved:
Disallowance of expenses under section 14A read with Rule 8D for exempt income.

Analysis:
The appeal was against the disallowance of Rs. 76,71,070 made by the Assessing Officer under section 14A read with Rule 8D. The assessee earned dividend income and share of profit from a partnership firm, both claimed as exempt under section 10. The Assessing Officer computed the disallowance as per Rule 8D due to the absence of any disallowance by the assessee. The first component of the disallowance was interest disallowed at Rs. 59.79 lakh, which the assessee argued against by stating that its investment leading to exempt income was significantly less than its free reserves and share capital. The Tribunal noted that for disallowance under section 14A, there must be a direct link between the expenditure and the exempt income. Referring to relevant case law, it was held that if there are interest-free funds available with the assessee sufficient to meet its investments, no disallowance of interest can be made. Consequently, the addition of Rs. 59.79 lakh on account of interest was deleted.

Regarding the second component of the disallowance, a sum of Rs. 16.92 lakh was made based on the average value of investments. The Tribunal upheld this disallowance as per Rule 8D for the assessment year 2008-2009, citing a judgment by the jurisdictional High Court. However, the Assessing Officer had included the amount invested by the assessee in the share capital of certain firms, which was not exempt income. The Tribunal directed the Assessing Officer to recompute this part of the disallowance in line with a Special Bench order discussing the issue of exempt income and taxable profits from the same source.

In conclusion, the appeal was partly allowed, with the disallowance of Rs. 59.79 lakh on account of interest being deleted, and a reworking of the disallowance under Rule 8D for the second component being ordered.