2015 (11) TMI 1668 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - Held that - We do not find ourselves in agreement with the proposition that the Rule 8D of the Rules being mandatory disallowance as per Rule 8D has to be made even in cases where no tax free income has earned or where tax free income earned is lesser than the amount computed as per Rule 8D of the Rules. In view of this we direct the Assessing Officer to limit the disallowance made under section 14A of the Act read with Rule 8D of the Rules to the amount of tax free income earned by the assessee. This ground of appeal raised by the assessee is allowed. Addition of interest under section 36(1)(iii) - Held that - This is an admitted fact in the present case that no specific loan was raised by the assessee for the purposes of purchase of this land. This is also a finding of fact recorded by the lower authorities that there were mixed funds available for this purpose with the assessee. On availability of mixed funds it cannot be presumed by the Revenue that the borrowed funds have been used for the purposes of acquisition of said land. See DCIT Vs. Samrat Forging Ltd. 2012 (5) TMI 760 - ITAT CHANDIGARH - Decided in favour of assessee.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961 read with Rule 8D.
2. Capitalization of interest under section 36(1)(iii) of the Act.

Issue 1: Disallowance under section 14A of the Income Tax Act, 1961 read with Rule 8D:
The case involved appeals against orders of the Commissioner of Income Tax (Appeals) relating to assessment year 2009-10. The dispute centered on the disallowance made by the Assessing Officer under section 14A of the Act read with Rule 8D. The assessee argued that the disallowance should be limited to the extent of dividend income earned, which was &8377; 98,870. The Assessing Officer had disallowed &8377; 12,35,568, exceeding the exempt income. The Tribunal referred to various judgments, including one by the Punjab & Haryana High Court, emphasizing that disallowance under section 14A cannot exceed the tax-free income earned. The Tribunal held that Rule 8D is a computational provision, and substantive provisions prevail. It directed the Assessing Officer to restrict the disallowance to the amount of tax-free income earned by the assessee, allowing the appeal partially.

Issue 2: Capitalization of interest under section 36(1)(iii) of the Act:
The second appeal involved the capitalization of interest under section 36(1)(iii) of the Act. The Assessing Officer had capitalized interest expenditure related to the purchase of land. The assessee contended that the investment was made from cash accruals and personal funds, not specific loans. The CIT (Appeals) directed the Assessing Officer to compute the disallowance on a day-to-day basis using the debt equity ratio. The Tribunal, citing a precedent by the Chandigarh Bench, held that in the absence of specific borrowings for the land purchase, the addition made by the Assessing Officer was unwarranted. It directed the deletion of the addition, ruling in favor of the assessee. The appeal was partly allowed.

In conclusion, both appeals were partly allowed, with the Tribunal providing detailed analyses for each issue, emphasizing the legal principles governing disallowances under section 14A and the capitalization of interest under section 36(1)(iii) of the Income Tax Act, 1961.