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2012 (12) TMI 568 - AT - Income TaxDisallowance of expense incurred in relation exempt income u/s 14A r.w Rule 8D Whether provision of Sec. 14A attracts on expense incurred to earn tax free income from SEZ unit Held that - As the similar issue has a been considered by the Tribunal in assessee s own case for AY 2007-08 that the investment or expenses incurred to earn income from SEZ, do not merit reckoning in computing disallowance u/s 14A. Therefore, AO is not justified for making the disallowance u/s.14A r.w. Rule 8D to consider the investment made in SEZ unit whose income is not includible in the total income of the assessee. Issue decides in favour of assessee Disallowance of interest u/s 14A in respect of dividend income Held that - The assessee has earned dividend which is not includible in the total income of the assessee as it is exempt as per sec 10(34/35). To earn the said dividend from the investment, it is a fact that assessee must have incurred some administrative cost to maintain portfolio. Therefore issue remand back to AO for making a reasonable disallowance u/s.14A.
Issues:
1. Disallowance under section 14A of the Income Tax Act. 2. Addition on account of difference in Modvat closing and opening stock. Issue 1: Disallowance under section 14A of the Income Tax Act: The appellant appealed against the order of the ld CIT(A) upholding the disallowance of Rs.87,77,656 under section 14A of the Income Tax Act. The AO had made the disallowance based on the investment made by the assessee and the tax-free dividend earned. The assessee argued that no specific borrowings were made for the investment in Mutual Fund, and expenses cannot be attributed to the tax-free income earned. Additionally, the assessee contended that the amount spent on the development of the SEZ unit should not be considered as part of the investment for computing disallowance under section 14A. The ld CIT(A) confirmed the AO's action, leading the assessee to appeal further before the Tribunal. Issue 1 Analysis (Continued): During the hearing, the appellant's representative argued that no direct expenses were incurred to earn the dividend income and that no interest-bearing borrowed funds were used for the tax-free income. The representative highlighted that the interest paid by the assessee was on debentures used for business purposes, and no additional interest cost was incurred for the tax-free income earned from investments. The appellant's representative referred to previous ITAT decisions and emphasized that if investments are made in an SEZ unit eligible for deduction, no disallowance under section 14A should be made. The appellant's representative also stressed the importance of the AO recording satisfaction before applying Rule 8D for disallowance under section 14A. Issue 1 Analysis (Continued): On the other hand, the ld D.R. supported the lower authorities' orders, stating that section 14A does not differentiate between exemption or deduction and that Rule 8D is applicable from the assessment year 2008-09. The Tribunal reviewed the submissions and orders, noting that no borrowed funds were used for investments generating tax-free income. The Tribunal found merit in the appellant's argument that investments in the SEZ unit should not be considered for disallowance under section 14A, citing a previous decision in the appellant's case. The Tribunal remitted the matter to the AO for a reasonable disallowance under section 14A for administrative costs related to the exempt dividend income earned. Issue 2: Addition on account of difference in Modvat closing and opening stock: The appellant's second ground of appeal regarding the addition of Rs.3,51,919 on account of the difference in Modvat closing and opening stock was not pressed during the hearing and was rejected by the Tribunal. Conclusion: The Tribunal allowed the appeal in part, setting aside the disallowance under section 14A related to investments in the SEZ unit and remitting the matter to the AO for a reasonable disallowance on administrative costs for the tax-free dividend income earned. The second ground of appeal regarding the Modvat closing and opening stock difference was rejected as it was not pressed during the hearing.
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