2015 (11) TMI 1712 - AT - Income Tax

Disallowance of interest u/s 14A r.w.r. 8D - nexus between the actual expenditure required and the task to be performed. - meddle with the amount of expenditure reached by applying the formula prescribed under Rule 8D(iii) of the Rules - Held that - CIT (A) found that an amount of ₹ 3.86 crores was available with the assessee on the sale of the investment out of which the assessee made fresh investment of ₹ 1.3 crores. Ld. CIT (A) further found from the record that the funds borrowed during the year were used for the business purposes and no part of borrowed funds was used for earning the exempt income. Ld. CIT (A) further noted that there is no finding of fact in respect of earlier years that the disallowance of interest was made in the earlier years in connection with the investments carried forward and held during the year. Basing on these factual findings, Ld. CIT (A) thought it fit to delete the addition of ₹ 75,94,474/- made under Rule 8D(ii) of the Rules. We see no reason to disturb this finding of fact based on record. In view of the fact that making investment, maintaining or continuing with any investment in a particular share/mutual fund etc. and the time when to exit from one investment to another are all the activities requiring well coordinated and well informed management decisions, involving not only inputs from various sources but it also involves acumen of senior management functionaries. We further agree with the reasoning of the Ld. CIT (A) that there are incidental administrative expenses on collecting the information, research, etc. which helps in arriving at particular investment decisions and these expenses, relating to earning of income are embedded in the indirect expenses without which it would not be possible to carry out this herculean task. We, therefore, agree with the authorities below that the expenditure of ₹ 44,143/- does not reflect the true nexus between the actual expenditure required and the task to be performed. With reference to ₹ 31.85 lacs, the administrative expenditure debited to profit and loss account, Ld. CIT (A) stated that out of this ₹ 31.85 lacs a sum of ₹ 26.54 lacs being spent on travelling cannot be allocated to the investment portfolio and has to be excluded from consideration. He apportioned the balance amount of 5.31 lacs to trading and investment and reached the figure of 2,65,500/- under Rule 8D(iii) of the Rules read with Section 14A of the Act. In our opinion this discretion is not available with the Ld. CIT (A) and only cap that could be put on the quantum of disallowance is the administrative expenditure debited to profit and loss account which is ₹ 31.85 lacs in this matter. Finding of the Ld. CIT(A), that the travelling expenses are excludable does not base on any material, much less a convincing one. We, therefore, find that the Ld. CIT (A) is not justified in exercising any discretion with the figure reached by the AO under Rule 8D(iii) of the Rules. However, keeping in view the fact that the total administrative expenses debited to the profit and loss account is only ₹ 31.85 lacs, we hold that the disallowance under Rule 8D(iii) of the Rules could be restricted to 31.85 lacs. To this extent, we allow the grounds of appeal. - Decided partly in favour of revenue

Summary

Issues:
1. Disallowance of interest under section 14A of the Income Tax Act.
2. Disallowance calculation under Rule 8D(iii) and Section 14A.
3. Discretion of authorities in reducing disallowance amounts under Rule 8D.

Issue 1: Disallowance of Interest under Section 14A:
The assessee, engaged in business activities related to shares and securities, filed a return declaring income as Nil under the Income Tax Act. The Assessing Officer (AO) made an addition of Rs. 113.51 lacs under section 14A, resulting in a total income computation of Rs. 113.51 lacs under normal provisions and Rs. 236.39 lacs under section 115JB. The AO invoked Rule 8D to calculate disallowances of Rs. 75,93,474 under Rule 8D(ii) and Rs. 37,58,360 under Rule 8D(iii). The Commissioner of Income Tax (Appeals) reduced the disallowance to Rs. 2,65,500, leading to the Revenue's appeal.

Issue 2: Disallowance Calculation under Rule 8D(iii) and Section 14A:
The argument presented by the Departmental Representative (DR) emphasized that the assessee's own funds from investments do not automatically imply no use of borrowed amounts for investments. The DR contended that Rule 8D eliminates discretion in reducing calculated amounts. Conversely, the Authorized Representative (AR) argued that the CIT (A) rightly deleted the addition under Rule 8D(ii) due to sufficient own funds exceeding investments and borrowed funds being used for business purposes. Regarding Rule 8D(iii), the AR supported the deletion of traveling expenses and the apportionment between trading and investment activities.

Issue 3: Discretion of Authorities in Reducing Disallowance Amounts under Rule 8D:
The Tribunal upheld the CIT (A)'s decision to delete the addition under Rule 8D(ii) based on factual findings that own funds exceeded investments and borrowed funds were used for business purposes. Concerning Rule 8D(iii), the Tribunal agreed with the authorities that the suo moto disallowance was insufficient given the complexity of investment decisions. The Tribunal found that the CIT (A) lacked discretion in altering the amount calculated under Rule 8D(iii) but restricted the disallowance to Rs. 31.85 lacs, the total administrative expenses debited to the profit and loss account. The appeal was allowed in part, with the disallowance under Rule 8D(iii) limited to Rs. 31.85 lacs.

In conclusion, the Tribunal's judgment addressed the issues of interest disallowance under section 14A, calculation under Rule 8D(iii) and Section 14A, and the discretion of authorities in reducing disallowance amounts. The decision provided detailed reasoning based on factual findings and legal interpretations, resulting in a partial allowance of the Revenue's appeal.