2013 (8) TMI 1020 - AT - Income Tax

Disallowance u/s 14A r.w. Rule-8D - Expenditure incurred towards exempt income - Assessee is a company engaged in the business of investment and trading. AO observed that the assessee has received loans from the shareholders and in turn, extended said loan to three of the companies, of which two of them are group concerns, thus assessee is not engaged in the business of money lending. Therefore, the AO treated the interest income as income from other sources' . HELD THAT - Interest earned on money lending operation arose from a systematic and organized activity carried on with a motive of profit and hence ought to be taxed under the head profits and gains of business or profession '. Decision in the case of - NARAIN SWADESHI WEAVING MILLS VERSUS COMMISSIONER OF EXCESS PROFITS TAX 1954 (10) TMI 11 - SUPREME COURT , relied upon.

Issues involved:
1. Treatment of interest income as 'income from Profits & Gains of Business or Profession' instead of 'income from other sources.'
2. Disallowance under section 14A without excluding certain assets.
3. Disallowance of administrative expenses under section 14A.

Detailed Analysis:
1. The first issue pertains to the treatment of interest income earned on money lending by the assessee. The Revenue contended that the interest income should be considered as 'income from other sources' based on the argument that the assessee's business was of investment and trading, not money lending. However, the CIT (A) allowed the claim by considering the company's object clause permitting money lending activities, resolutions passed by the Board of Directors, and the systematic nature of money lending transactions. The CIT (A) relied on legal precedents defining 'business' and concluded that the interest income arose from a profit-motivated activity, thus falling under 'profits and gains of business or profession.' The Tribunal upheld the CIT (A)'s decision, emphasizing the authorization for money lending in the object clause and the organized nature of the transactions, dismissing the Revenue's appeal on this ground.

2. The second issue involves the disallowance under section 14A without excluding certain assets. The AO had disallowed specific amounts for interest and administrative expenses under Rule-8D(2), leading to a total disallowance. The CIT (A) partially allowed the appeal by reducing the disallowance amount after considering the computations provided by the assessee. The Revenue challenged this decision, arguing that the relief granted was excessive and questioning the CIT (A)'s acceptance of the computations without thorough verification. The Tribunal acknowledged the correctness of the disallowance but directed the AO to verify the calculations before finalizing the disallowance amount, emphasizing compliance with Rule-8D. Ultimately, the Tribunal upheld the CIT (A)'s decision on the disallowance issue, dismissing the Revenue's appeal.

3. The third issue concerns the disallowance of administrative expenses under section 14A. The AO had made disallowances based on Rule-8D(2)(iii), which the CIT (A) partially confirmed after considering the computations provided by the assessee. The Revenue contested this decision, claiming that the CIT (A) should have remanded the calculation to the AO for verification. The Tribunal, after hearing both parties, upheld the CIT (A)'s decision on the disallowance, subject to the correctness of the calculations under Rule-8D(2). The Tribunal confirmed the order of the CIT (A) regarding the disallowance of administrative expenses, dismissing the Revenue's appeal on this ground as well.

In conclusion, the Tribunal upheld the CIT (A)'s decisions on all issues raised by the Revenue, dismissing the appeal and affirming the treatment of interest income as 'income from Profits & Gains of Business or Profession' and the disallowances made under section 14A.

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