2017 (8) TMI 1313 - AT - Income Tax

Disallowance made u/s 14A - proof of sufficiency of own funds - Held that - As primary argument advanced by the Ld. DR that netting principle of interest considered by the Ld. CIT(A) would become irrelevant as admittedly the assessee in the instant case has got sufficient own funds which is several times more than the investments made by her. These details are very much available in the order of the Ld. CIT(A) and had not been controverted by the Revenue before us. Hence we hold that the Ld. CIT(A) had rightly deleted the disallowance made u/s 14A read with Rule 8D(2)(ii) of the Rules. With regard to disallowance made towards administrative expenses under Rule 8D(2)(iii) we find that the assessee on her own had disallowed a sum of 5 lacs in the return of income out of total administrative expenses of 40, 73, 576/-. AO had not given any satisfaction as to how the said disallowance made by the assessee is incorrect having regard to the accounts of the assessee in terms of Section 14A(2) read with Rule 8D(1) of the Rules. Thus without doing the same the Ld.AO cannot mechanically resort to Rule 8D of the Rules and in the instant case the disallowance made by the assessee in the sum of 5 lacs is reasonable having regard to the accounts of the assessee and accordingly the Ld. CIT(A) had rightly deleted the further disallowance made by the Ld. AO in this regard. - Decided against revenue

Summary

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

Analysis:
1. The appeal by the Revenue challenged the deletion of disallowance made under section 14A of the Act by the Learned Commissioner of Income Tax (Appeals) for the Assessment Year 2010-11.
2. The main issue was whether the Ld. CIT(A) was justified in deleting the disallowance of ?39,73,576 made under section 14A of the Act.
3. The assessee, engaged in various financial activities, had earned exempt income through dividends and interest from PPF. The Ld. AO invoked Section 14A read with Rule 8D to disallow expenses related to earning exempt income.
4. The Ld. CIT(A) analyzed the financials and case laws, concluding that no disallowance was warranted under Rule 8D(2) for interest expenses due to sufficient own funds. He also accepted the voluntary disallowance of ?5 lakhs by the assessee towards administrative expenses.
5. The Revenue contended that the Ld. CIT(A) erred in allowing the appeal, arguing that the interest netting was incorrect and the disallowance under Rule 8D was justified.
6. The Tribunal found that the assessee had ample own funds compared to investments, justifying the deletion of disallowance under Rule 8D(2)(ii) by the Ld. CIT(A).
7. Regarding administrative expenses disallowance under Rule 8D(2)(iii), the Tribunal upheld the Ld. CIT(A)'s decision to delete the further disallowance as the voluntary disallowance by the assessee was reasonable and not contested by the Ld. AO.
8. The Tribunal dismissed the Revenue's appeal, affirming the Ld. CIT(A)'s decision to delete the disallowance under section 14A of the Act.

This judgment clarifies the application of Section 14A and Rule 8D in determining disallowances related to exempt income, emphasizing the importance of assessing own funds, voluntary disallowances, and reasonableness of expenses in such cases.