2013 (1) TMI 908 - AT - Income Tax

Disallowance u/s 14A r/w Rule 8D - The AO ascertained some interest being attributable to the earning of exempt income and disallowed the same u/s 14A. - HELD THAT - The matter requires to go back to the file of the AO for deciding it in the light of MAXOPP INVESTMENT LTD., CHEMINVEST OTHERS VERSUS COMMISSIONER OF INCOME TAX, COMMISSIONER OF INCOME TAX VERSUS ESCORTS FINANCE LTD 2011 (11) TMI 267 - DELHI HIGH COURT .

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961.

Analysis:
The judgment involved cross-appeals by the assessee and the department against the order of the CIT(A)- VI, New Delhi for the assessment year 2004-05. The main issue revolved around the disallowance under section 14A of the IT Act. The Assessing Officer disallowed interest amounting to Rs. 97,87,517/- as attributable to earning exempt income, based on the investment made by the assessee in shares using borrowed funds. The assessee contended that no dividend income was received during the year, and the investment was primarily for capital gain, not dividend income. The CIT(A) upheld the disallowance but directed the Assessing Officer to calculate the disallowable interest on a pro-rata basis against the net interest income debited to the profit and loss account.

The assessee raised multiple arguments challenging the disallowance under section 14A. The CIT(A) considered the case law and found the Assessing Officer's disallowance justified, although he agreed with the assessee's argument regarding the apportionment of interest against the net interest income. The CIT(A) directed the Assessing Officer to re-calculate the disallowable interest accordingly. The assessee further argued for the matter to be reconsidered in light of the Maxopp Investment Ltd. vs. CIT case. The Assessing Officer and the Departmental Representative agreed to the matter being sent back for reconsideration.

The Tribunal referred to the Maxopp Investment Ltd. case, emphasizing the conditions precedent for the Assessing Officer to determine the expenditure related to exempt income under section 14A. Following this decision, the Tribunal set aside the orders of the authorities below and directed the matter to be reconsidered by the Assessing Officer after giving the assessee due opportunity. Consequently, both appeals were allowed for statistical purposes.

In conclusion, the judgment addressed the disallowance under section 14A of the IT Act, focusing on the apportionment of interest against the net interest income and the conditions for determining expenditure related to exempt income. The matter was sent back to the Assessing Officer for reconsideration in line with the Maxopp Investment Ltd. case.