2013 (4) TMI 850 - AT - Income Tax

Summary

Issues Involved:
1. Addition u/s 14A for AY 2008-09.
2. Addition u/s 14A for AY 2009-10.

Summary:

Issue 1: Addition u/s 14A for AY 2008-09

The Assessee declared a total income at a loss of Rs. 25,16,414/-, but the AO determined the total income at Rs. 26,67,067/-. The only addition made was u/s 14A at Rs. 51,83,481/-. The AO noticed that the Assessee earned tax-free dividend income of Rs. 3,79,84,245/- from mutual funds and disallowed the entire interest paid of Rs. 39,34,995/- under Rule 8D. The CIT(A) confirmed this disallowance.

The Assessee argued that the AO mechanically applied the provisions of section 14A without considering the accounts. The interest paid was on a loan taken from Ms. Sabita R Narang, which was advanced to M/s Nautilus Trading & Leasing Pvt. Ltd., earning interest income. The Assessee claimed that the disallowance of Rs. 31,21,267/- of interest was not justified due to the direct nexus with taxable income. The CIT(A) did not agree, citing the Special Bench decision in Daga Capital Management.

The Tribunal found that the AO and CIT(A) did not consider the Assessee's explanations and invoked Rule 8D without determining the correctness of the Assessee's claim. The Tribunal held that Rule 8D cannot be invoked without proper satisfaction by the AO as mandated by subsection 2 of section 14A. The Tribunal modified the orders of the AO and CIT(A), directing the AO to disallow one percent of the dividend income as disallowance u/s 14A. The appeal was partly allowed.

Issue 2: Addition u/s 14A for AY 2009-10

The Assessee earned Rs. 1,89,91,244/- as dividend from mutual funds and claimed exemption. The AO directly applied Rule 8D and disallowed Rs. 83,29,250/- u/s 14A, confirmed by the CIT(A). The Tribunal found that the interest payment of Rs. 84,65,740/- had a direct nexus to the interest income of Rs. 84,09,148/- from inter-corporate deposits and could not be considered for disallowance u/s 14A. The Tribunal noted that the AO did not record any satisfaction before invoking Rule 8D, as required by subsection 2 of section 14A. The Tribunal directed the AO to disallow one percent of the dividend income as reasonable for earning exempt income. The appeal was partly allowed.

The Tribunal criticized the mechanical approach of the AO and CIT(A) in passing the orders, noting that the Assessee had established a direct nexus in detailed submissions. The CIT(A)'s findings were not based on the facts available on record. The Tribunal determined a reasonable amount for disallowance u/s 14A based on the facts of the case.

Conclusion:

Both appeals were partly allowed, with the Tribunal directing the AO to disallow one percent of the dividend income as disallowance u/s 14A for both AY 2008-09 and AY 2009-10.