2012 (7) TMI 127 - AT - Income Tax

Disallowance u/s 14A by invoking Rule-8D - interest claim of the assessee is disallowable on the ground that the assessee has used the interest bearing borrowed funds in the investment of shares - Held that - The interest expenses is allowable under section 36(1)(iii) such disallowance cannot be made in case where the assessee is having sufficient interest free funds - As decided in case of CIT vs. Hero Cycles Limited, 323 2009 (11) TMI 33 (HC) wherein it has been held that disallowance under section 14A is not permissible where no nexus between the expenditure incurred and income generated has been established - the admitted fact that the assessee was having sufficient own interest free fund to cover the investment made in shares no disallowance can be made under section 14A and Rule 8D can be applicable only where disallowance of interest on borrowed capital warrant for expenses out of such borrowed capital with the amount relating to investment in shares and search and not ascertainable - decided against revenue.

Summary

Issues:
Disallowance of expenses under section 14A of the Income Tax Act for Assessment Years 2006-07 & 2007-08.

Analysis:
1. The appeals were filed against orders passed by the ld. CIT(A)-II, Agra for the Assessment Years 2006-07 & 2007-08. The common ground raised in both appeals pertained to the disallowance of expenses under section 14A of the Income Tax Act.

2. The Assessing Officer noticed that the assessee had made investments in shares and calculated the disallowance amount using Rule-8D of the Income Tax Rules. The CIT(A) sustained the addition to the extent of &8377; 15,00,000/- for each Assessment Year. The CIT(A) held that section 147 of the Act read with Rule 8D of the Income Tax Rules was not applicable but disallowed the expenses based on the decision of the I.T.A.T. Special Bench in a specific case.

3. The ld. Authorised Representative argued that Rule 8D was wrongly invoked retrospectively and cited the order of I.T.A.T. Agra Bench in a different case to support the deletion of the addition. It was highlighted that the assessee had sufficient interest-free funds before investing in shares.

4. The I.T.A.T., Agra Bench considered various judicial pronouncements and found that the disallowance of interest was not warranted as the assessee had enough interest-free funds to cover the investments made in shares. Citing relevant case laws, it was concluded that no disallowance could be made under section 14A of the Act, and Rule 8D was not applicable in this scenario.

5. The I.T.A.T. ultimately deleted the additions made by the Assessing Officer and sustained by the CIT(A) for both Assessment Years. The decision was based on the fact that the assessee had sufficient own interest-free funds to cover the investments in shares, thus ruling out the need for any disallowance under section 14A of the Act.

6. In conclusion, both appeals of the assessee were allowed, and the additions made by the Assessing Officer were deleted for Assessment Years 2006-07 & 2007-08.