2015 (3) TMI 1277 - AT - Income Tax

Disallowance u/s.14A r.w.r.8D - Held that - No merit in the disallowance so made by the AO, insofar as rule 8D can be applied only when assessee has claimed certain expenditure against earning of exempt income. In the instant case, the AO has made disallowance under Rule 8D on the plea that the assessee has made investment in partnership firm, income of which is exempt. We found that on the capital so invested in the partnership firm, the assessee has earned substantial interest income which is liable to tax. As per the audited profit and loss account placed in the record, we found that assessee has earned gross interest income of ₹ 2,51,65,257/- and paid interest of ₹ 80,17,792/- which resulted into net interest income of ₹ 1,71,47,465/-. Most of the investment was out of interest free funds available with it and even in respect of the part of the investment made out of borrowings, since the assessee has earned interest income thereon which was more than what was paid against the borrowing, no disallowance is warranted under rule 8D. AO is empower to make disallowance u/s.14A r.w.r.8D only if the assessee has debited certain interest expenditure which are attributable to earning the exempt income. In case the assessee has not claimed any interest expenditure attributable to earning exempt income, no disallowance is warranted under rule 8D. For the administrative expenses claimed in the profit and loss account, we found that assessee has earned taxable income of ₹ 1,71,52,765/- and after claiming such expenses offered not taxable income of ₹ 1,68,36,770/-. Thus, it is clear that entire administrative expenses are attributable to earning of the taxable income. It is pertinent to mention here that no exempt income was earned by assessee during the year under consideration, therefore, disallowance merely on the presumption that in future assessee may earn exempt income is not taxable when assessee has not claimed any expenditure in its profit and loss account for earning of exempt income. Accordingly, we reverse the order of both the lower authorities and direct the AO to delete the disallowance made u/s.14A r.w.r.8D. - Decided in favour of assessee.

Summary

Issues: Disallowance under Section 14A read with Rule 8D

Analysis:
The appeal was filed against the order of the CIT(A) for the assessment year 2009-10 regarding disallowance under Section 14A read with Rule 8D. The Assessing Officer (AO) disallowed expenses under Section 14A as the assessee had investments in the balance sheet generating exempt income. The AO sought to establish a nexus between interest-bearing loans and investments to justify the disallowance. The assessee contended that no disallowance should be made as there were sufficient interest-free funds available and investments were made to earn taxable income. The CIT(A) upheld the disallowance, leading to the appeal before the tribunal.

The tribunal noted that the assessee was engaged in real estate and financing/investment activities. The company borrowed funds at a lower interest rate and advanced them at a higher rate, with the income being taxed under "Income from Business & Profession." The assessee was also a partner in firms but had not earned any exempt income. The AO applied Rule 8D to calculate the disallowance, which the tribunal found unjustified. The tribunal observed that Rule 8D can be applied only when certain expenses are claimed against earning exempt income. Since the assessee had earned substantial interest income from investments, no disallowance was warranted under Rule 8D.

Regarding administrative expenses, the tribunal found that they were entirely attributable to earning taxable income, as no exempt income was earned during the relevant year. Disallowance based on the presumption of future exempt income was deemed unwarranted when no expenditure was claimed for earning exempt income. Consequently, the tribunal directed the AO to delete the disallowance made under Section 14A read with Rule 8D. The appeal of the assessee was allowed, and the order was pronounced on March 4, 2015.