2012 (12) TMI 1047 - AT - Income Tax

Disallowance of expenditure u/s 14A - interest expense and management expense - whether expense to be disallowed in relation to exempt income - Held that - administrative and other expenses are fixed irrespective of the fact whether or not tax free income is earned and therefore, these expenses cannot said to be relatable to exempt income - also there is nothing on record brought out by the AO that the assessee has actually incurred any expenditure in relation to the exempt income - the addition of ₹ 7.05 crores being the proportionate disallowance of interest expenses is deleted - decided in favor of assessee

Issues Involved:
1. Prematurity of CIT(A)'s relief due to pending High Court decision.
2. Disallowance under Section 14A and its calculation.
3. Utilization of bank funds for earning exempt income.
4. Retrospective application of Section 14A subsections (2) and (3) and Rule 8D.

Detailed Analysis:

1. Prematurity of CIT(A)'s Relief:
The Revenue argued that the CIT(A)'s decision to allow relief was premature because the ITAT's order under Section 263 of the CIT, J&K had not attained finality, pending a decision from the High Court of J&K. However, this ground was deemed infructuous as the addition had already been deleted by the AO by giving effect to the ITAT's order.

2. Disallowance under Section 14A:
The Revenue contended that the CIT(A) erred in directing the AO to restrict the disallowance under Section 14A to Rs. 8.10 lakhs, arguing that the exempt income was earned after investment and that the AO had rightly worked out the disallowance based on proportionate interest and management expenses. The CIT(A) observed that the assessee had enough own funds to invest in exempt income and that the AO had not established a direct nexus between the expenditure and the exempt income. The CIT(A) relied on various judicial pronouncements and remand reports to conclude that only notional proportionate interest could be disallowed. The ITAT upheld this view, reiterating that the AO had not brought on record any actual expenditure incurred by the assessee for earning the exempt income.

3. Utilization of Bank Funds:
The AO argued that the assessee utilized bank funds for earning exempt income and thus, proportionate disallowance of interest and management expenses was justified. The assessee countered that it had sufficient interest-free funds for such investments. The CIT(A) and ITAT found that the assessee had indeed demonstrated the availability of interest-free funds exceeding the investments in tax-free securities, and thus, no disallowance was warranted. The ITAT emphasized that the burden of proving the nexus between the expenditure and the exempt income lay with the AO, which was not satisfactorily discharged.

4. Retrospective Application of Section 14A and Rule 8D:
The Revenue claimed that subsections (2) and (3) of Section 14A and Rule 8D were retrospective and should apply to the assessment year in question. The assessee argued, supported by the decision of the Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. vs. Deputy CIT, that these provisions were prospective and applicable only from the assessment year 2008-09 onwards. The ITAT upheld this view, noting that Rule 8D was notified on March 24, 2008, and thus applicable from the assessment year 2008-09. Consequently, the ITAT dismissed the Revenue's ground on this issue.

Conclusion:
The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decision to restrict the disallowance under Section 14A and confirming that the assessee had sufficient interest-free funds for its investments in exempt income. The ITAT also ruled that the provisions of Section 14A subsections (2) and (3) and Rule 8D were not applicable retrospectively. The cross-objection filed by the assessee was allowed, and the disallowance of Rs. 8.10 lakhs was also directed to be deleted.

← Previous Next →