2012 (10) TMI 247 - AT - Income Tax

Dis-allowance u/s 14A of interest paid on O/D Account and other interest - assessee in receipt of dividend income, exempt from tax other than salary income and interest income - assessee contended that over-draft facility was used towards investment in shares on which the assessee has shown gain and offered to tax - Held that - Applicability of the provisions of section 14A is now to be determined in the light of the order in the case of Godrej & Boyce Mfg. Co.Ltd. Mumbai vs. DCIT (2010 (8) TMI 77 - BOMBAY HIGH COURT) wherein Court has recapitulated the conclusion and pronounced that a finding is required whether the investment in shares is made out of own funds or out of borrowed funds. U/s 14A, expenditure incurred in relation to exempted income is to be disallowed only if the Assessing Officer is satisfied with the expenditure claimed by the assessee pertaining to the said exempt income. Court has made very specific that in case, no such exercise was carried out by the Assessing Officer then the matter is to be remanded back for afresh investigation and provisions of Rule 8D shall apply w.e.f. AY 2008-09; Since Assessing Officer had not enquired the issue in the light of the above legal pronouncement. Specially the pronouncement of the High Court was not available at that time, hence, the Assessing Officer s assessment order was devoid of merits as also the law applicable. Matter restored back.

Summary

Issues:
Disallowance of interest amounting to Rs.6,78,200 under section 14A of the Income Tax Act, 1961.

Analysis:
The appellant, an individual earning salary, interest income, and dividend income, debited interest on O/D Account and other interest paid against interest income in the Profit & Loss account. The Assessing Officer disallowed the interest claiming it against the exempted dividend income. The appellant argued that the over-draft facility was used for investments in shares, generating taxable income. The first appellate authority upheld the disallowance, emphasizing the lack of a direct nexus between interest earned and expenses. The appellant failed to prove the nexus despite claiming sufficient funds for investments.

The Tribunal referred to the judgment of the Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co.Ltd. Mumbai vs. Dy.CIT, emphasizing the need to establish a nexus between investments and borrowings for disallowance under section 14A. The Tribunal concluded that the Assessing Officer must determine expenditure related to earning non-taxable income. The Tribunal remanded the matter back to the Assessing Officer for a fresh determination, considering the legal pronouncements and providing the appellant with an opportunity to present relevant material.

The Tribunal clarified that dividend income and income from mutual funds falling under Section 10(33) are not includible in total income, disallowing related expenditures under section 14A(1). The Tribunal highlighted the constitutionality of sub-sections (2) and (3) of section 14A and the validity of Rule 8D of the Income Tax Rules. The Tribunal directed the Assessing Officer to enforce section 14A(1) for determining expenditure related to non-taxable income, even before Rule 8D's applicability. The Tribunal remanded the proceedings for Assessment Year 2002-03 to the Assessing Officer for a fresh determination based on the legal guidelines provided.

In light of the legal pronouncements and guidelines, the Tribunal allowed the appeal for statistical purposes, restoring the matter for a fresh decision by the Assessing Officer to compute the correct disallowance after providing the appellant with a fair opportunity to present relevant material.