2015 (1) TMI 1298 - AT - Income Tax

Disallowance of interest u/s.14A - Held that - We have considered rival contentions and found that the AO accepted the contention of the appellant partially that the borrowed funds were utilized for the business purpose and accordingly did not make any disallowance of interest u/s.14A. The AO has invoked the provisions of section 14A and applied the formula as prescribed under Rule 8D of the Income Tax Rules following the decision in the case of Godrej & Boyce 2010 (8) TMI 77 - BOMBAY HIGH COURT and made the disallowance of ₹ 94,09,045/- u/s.14A by calculating 0.5% of the average investments, from which income earned is exempt.

Summary

Issues:
1. Disallowance of short term capital loss u/s. 94(7)
2. Disallowance made u/s 14A r.w.r. 8D of the I.T. Rules

Issue 1: Disallowance of short term capital loss u/s. 94(7)
The assessee contested the disallowance of short term capital loss of Rs. 23,49,015/- u/s.94(7) of the Act. The contention was that the provisions of section 94(7) were erroneously applied as the dividend income was earned from a Daily dividend scheme of a Mutual fund, where the concept of record date, as required by sec. 94(7), was not applicable. The Tribunal referred to a similar case and directed the AO to examine whether any record date was involved in the schemes to decide the issue correctly. The matter was remitted back to the AO for further assessment.

Issue 2: Disallowance made u/s 14A r.w.r. 8D of the I.T. Rules
Regarding the disallowance u/s.14A, the AO invoked the provisions and applied Rule 8D to calculate the disallowance of Rs. 94,09,045/- by considering 0.5% of the average investments. The CIT(A) confirmed this disallowance. The assessee argued that no proximate expenses related to exempt income were incurred, and investments were made from own surplus capital, not borrowed funds. The ITAT Delhi Bench's decision in a similar case highlighted that strategic investments should be excluded from the computation of disallowance under Rule 8D(iii). Following this precedent, the Tribunal directed the AO to recompute the disallowance considering the exclusion of strategic investments. Consequently, the appeal of the assessee was allowed in part.

In conclusion, the Tribunal addressed the issues of disallowance of short term capital loss u/s. 94(7) and disallowance u/s 14A r.w.r. 8D of the I.T. Rules by providing detailed analysis and referring to relevant legal precedents. The judgment emphasized the correct application of provisions and directed the AO to reevaluate the disallowances in light of the specific circumstances and legal principles involved.