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2011 (6) TMI 331 - AT - Income TaxInterest - disallowance u/s 14A in proportion to amount of investment and total fund employed - Held that - Plea of the assessee is liable to be rejected because if any expenditure has been incurred for earning exempt income the same has to be disallowed even if there is no actual earning of any exempt income. If interest-bearing borrowed funds are utilised for the purpose of investment in shares and there is no receipt of dividend income or if there is only meagre amount of dividend income even then the whole amount of interest expenditure incurred for this purpose will be subject to disallowance under section 14A because the same has been incurred for earning exempt income. Hence the actual earning of exempt income is not relevant - In the earlier period when dividend income was not exempt interest expenditure incurred on borrowed funds used for investment in shares was held to be fully allowable expenses even if there was no actual receipt of dividend or insufficient/meagre amount of dividend income - Decided against the assessee.
Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act. 2. Applicability of Section 40(b) concerning interest paid to partners. 3. Calculation method for disallowance of interest. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A of the Income-tax Act: The core issue revolves around the disallowance of Rs. 17,04,535 under Section 14A by the Assessing Officer (AO). The AO observed that the assessee firm had investments in mutual funds, shares, debentures, and bonds, generating exempt income. The AO noted that the expenses related to earning this exempt income were debited to the Profit & Loss Account, and thus, a proportionate interest expenditure was disallowed under Section 14A. The assessee contended that no expenditure was incurred in relation to the exempt dividend income, arguing that the interest paid to depositors and partners was not related to the dividend income. However, the AO concluded that the investments were made from the firm's funds, which included partners' capital and outside borrowings, and thus, disallowed the interest expenditure proportionately. 2. Applicability of Section 40(b) concerning interest paid to partners: The assessee argued that interest paid to partners is a special deduction under Section 40(b) and should not be disallowed under Section 14A. The AO and the CIT(A) rejected this argument, stating that Section 14A is a separate provision aimed at disallowing expenses incurred in earning exempt income. The CIT(A) upheld the AO's disallowance, emphasizing that the capital employed for investments in mutual funds, shares, and debentures was not for the business of the assessee firm, as stated in the partnership deed. The CIT(A) also noted that the provisions of Section 40(b) were not applicable in this case as the funds were utilized for investment purposes rather than business purposes. 3. Calculation method for disallowance of interest: The assessee proposed an alternative calculation method for disallowance, suggesting that the disallowance should be proportional to the taxable and non-taxable income earned rather than the amount of investment and total funds employed. The Tribunal rejected this plea, stating that if any expenditure is incurred for earning exempt income, it should be disallowed irrespective of the actual earning of exempt income. The Tribunal emphasized that even if there is no actual receipt of dividend income or only a meager amount, the entire interest expenditure incurred for making investments in shares should be disallowed under Section 14A. Conclusion: The Tribunal upheld the disallowance of Rs. 17,04,535 under Section 14A, rejecting all the contentions raised by the assessee. It concluded that the interest paid to partners is not a special deduction but an expenditure subject to disallowance under Section 14A if incurred for earning exempt income. The Tribunal also dismissed the alternative calculation method proposed by the assessee, affirming that the entire interest expenditure should be disallowed if it is related to investments generating exempt income. Final Judgment: The appeal of the assessee was dismissed, and the disallowance of Rs. 17,04,535 under Section 14A was upheld.
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