2015 (10) TMI 2646 - AT - Income Tax

Addition u/s 14A - Held that - From the perusal of Profit & Loss Account it appears that no interest to bank or otherwise was paid in the earlier year which goes to prove that the investments having been made in earlier year were made out of owned funds of the assessee and no borrowed funds were used for such investments. As regards interest of Rs. 66, 91, 327/- being paid this year it is seen from the perusal of Annexure-3 of the balance sheet that ICICI working capital limit amounting to Rs. 49, 99, 98, 560/- was raised during the year which was not there in the preceding year which further goes to prove that the interest paid during the year does not have any nexus to the investments and thus not to the tax-free income from these investments having earned. Therefore any disallowance of interest expenditure being related to earning tax-free income cannot be made in this case. There is no need to go further on the issue of disallowance of interest part of the expenses related to earning tax-free income as from the explanation and evidences brought on record by the assessee as stated hereinabove it is proved beyond doubt that the interest expenditure incurred by the assessee during the year does not have any nexus to earning of tax-free income. As regards the administrative expenses part of the disallowance under section 14A the assessee has all along been contending before the lower authorities that there was no need for it to incur any such expenditure and it has in fact incurred no such expenditure the Assessing Officer straightaway without commenting on such claim of the assessee embarked upon computation under Rule 8D of the Income Tax Rules for the purpose of section 14A of the Act. She has nowhere recorded her satisfaction that how such claim of the assessee is not acceptable to her. From the perusal of the whole order of the Assessing Officer no such satisfaction can be inferred directly or indirectly. In such circumstances the recording of satisfaction of the Assessing Officer is a must as held in the case of CIT Vs. Deepak Mittal. (2013 (9) TMI 764 - PUNJAB & HARYANA HIGH COURT ). Therefore in the circumstances no disallowance on account of expenses under section 14A of the Act can be made. - Decided in favour of assessee.

Summary

Issues involved:
Disallowance of expenses under section 14A of the Income Tax Act, 1961 - Disallowance of interest expenditure relating to tax-free income - Disallowance of administrative expenses under section 14A of the Act.

Analysis:
1. The case involved cross-appeals against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2010-11. The Assessing Officer had disallowed Rs. 84,00,560 under section 14A of the Act, invoking Rule 8D of the Income Tax Rules.

2. The assessee argued that investments were made from own funds, not borrowed, and the interest expenses claimed were related to taxable income. The Commissioner upheld the disallowance, noting the secured loan from a bank and interest expenses. However, she restricted the disallowance to the extent of exempt income earned.

3. The assessee appealed, reiterating that investments were from own funds and interest expenses were linked to taxable income. The Department argued for adherence to Rule 8D for disallowance.

4. The Tribunal found that investments were made in earlier years from owned funds, not borrowed, and interest paid during the year was not linked to tax-free income. Relying on a High Court judgment, the Tribunal held no disallowance on interest expenditure could be made.

5. Regarding administrative expenses, the Tribunal noted the Assessing Officer's failure to record satisfaction on the claim of no such expenditure by the assessee. Citing jurisprudence, the Tribunal held no disallowance under section 14A could be made in such circumstances.

6. Consequently, the Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal. The judgment was pronounced on October 19, 2015.