2013 (6) TMI 755 - AT - Income Tax

Disallowance u/s 14A u/r 8D - Held that - It is pertinent to note that when the Assessing Officer had not made any disallowance u/s 14A on account of interest expenditure in the earlier year; therefore in the absence of fresh investment during the year no disallowance can be made on account of interest by applying the provisions of sec. 14A. Further the assessee earned the interest income of 42, 17, 981/- against the interest 11, 38, 531/- which show that interest income is more than the interest expenditure and therefore it cannot be presumed that borrowed fund was utilised for the purpose of making the investments in the shares. - Decided in favour of assessee Disallowance on account of administrative expenditure - Held that - We do not find any error or illegality in the impugned orders of the authorities below to the extent of disallowance on account of administrative expenditure. Accordingly the disallowance ofRs.2, 2, 24, 238/- made u/s 14A on account of administrative expenditure is upheld.

Summary

Issues:
Whether the Commissioner of Income Tax(Appeals) erred in upholding the disallowance u/s 14A of Rs. 17,65,069/- u/r 8D of I T Rules without appreciating the appellant's sufficient interest-free funds for investments, and whether the borrowed funds were utilized for making investments in shares.

Analysis:

1. Disallowance u/s 14A of Rs. 17,65,069/-:
- The Assessing Officer proposed disallowance u/s 14A on interest and administrative expenditure using Rule 8D of the I T Rules.
- Assessee argued own funds were enough for investments and shares were acquired for control, not dividends.
- Assessing Officer disallowed Rs. 17,65,069/-, not accepting the assessee's contentions.
- Commissioner of Income Tax(Appeals) upheld the disallowance.
- Assessee argued interest income exceeded expenditure, hence no disallowance was warranted.
- Tribunal found own funds covered investment costs, no fresh investments were made, and interest income exceeded expenditure, aligning with the decision in Commissioner of Income-tax v. Reliance Utilities and Power Ltd. (313 ITR 340).
- Disallowance on administrative expenditure was upheld, resulting in partial allowance of the appeal.

2. Utilization of Borrowed Funds:
- The Assessing Officer applied Rule 8D for disallowance due to mixed funds usage.
- Tribunal noted no fresh investments in the year, and interest income exceeded expenditure, indicating borrowed funds weren't used for investments.
- Citing precedent, the Tribunal ruled against disallowance u/s 14A on interest expenditure but upheld it for administrative expenditure.
- The decision was based on the facts and the Commissioner's order, resulting in partial allowance of the appeal.

In conclusion, the Tribunal partially allowed the appeal, rejecting disallowance u/s 14A on interest expenditure but upholding it on administrative expenditure, emphasizing the importance of the source of funds and the nature of investments in determining the applicability of disallowances under Rule 8D of the I T Rules.