2013 (7) TMI 686 - AT - Income Tax

Disallowance under section 14A - Disallowance of indirect interest expenditure Held that - Disallowance of Indirect Tax expenditure cannot be disallowed in the assessee s case firstly the assessee has not claimed any interest in the Profit & Loss account and secondly the same has been debited to the assessee s own capital account Disallowance of interest on the dividend income in the hands of minor Held that - No expenditure can be disallowed because apparently no expenditure has been debited to the minor s account. Disallowance of Rs. 4, 48, 753 being attributable to % of the average investment - Assessee has failed to prove that no interest bearing funds was used for acquisition of shares Held that - Assessee has interest free funds also and most of the investments have been made out of such funds - Thus set aside the impugned order passed by the learned Commissioner (Appeals) and restore the issue of disallowance under rule 8D to the extent of % of the average investment to the file of the Assessing Officer to examine whether or not the assessee had made acquisition in the investment out of interest free funds.

Summary

Issues:
Challenge to the impugned order for the quantum of assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2008-09. Disallowance of expenditures under section 14A r/w rule 8D.

Analysis:

Issue 1: Challenge to Assessment Order
The appeal was filed by the assessee against the order passed by the Commissioner (Appeals) for the assessment year 2008-09 under section 143(3) of the Income Tax Act, 1961. The main contention was regarding the disallowance of expenditures made under section 14A r/w rule 8D.

Issue 2: Disallowance of Expenditures
The Assessing Officer observed discrepancies in the balance sheet regarding investments in shares and financial institutions, leading to the disallowance of expenditures under section 14A. The disallowance included indirect interest, a percentage of average investment, and a portion of dividend income earned by the minor. The Assessing Officer computed the disallowance based on the historical value of shares and interest expenditure incurred.

Issue 3: Confirmation of Disallowance
The Commissioner (Appeals) upheld the disallowance, stating that the assessee failed to prove the separation of interest-bearing and non-interest-bearing funds used for share acquisition. The disallowance on administrative and minor's dividend income was also confirmed.

Issue 4: Assessee's Arguments
The assessee contended that interest was not debited in the Profit & Loss account but in the capital account, hence no disallowance should be made. Additionally, the assessee argued against the disallowance of other expenditures related to dividend income and claimed investments were made from interest-free loans.

Issue 5: Tribunal's Decision
The Tribunal agreed with the assessee regarding the disallowance of indirect interest expenditure and the absence of expenditure related to the minor's dividend income. However, regarding the disallowance of a percentage of the average investment, the Tribunal directed the issue back to the Assessing Officer for further examination. The assessee was instructed to provide necessary details for a conclusive decision.

In conclusion, the Tribunal partially allowed the assessee's appeal for statistical purposes, emphasizing the need for clarity on the source of funds for investments to determine the applicability of disallowances under section 14A and rule 8D.