2014 (9) TMI 791 - HC - Income Tax

Partial disallowance u/s 14A r.w Rule 8D Held that - The AO has noted that the assessee had invested a certain amount of its funds in shares and that the dividend which has been received or receivable did not form part of the total income - The AO noted that there were certain expenses on account of interest etc. which were directly attributable to the exempt income - The assessee had debited the entire expenditure to the profit or loss account - The AO noted that since the exempt income does not form part of the total income, the expenditure which is directly related to income which does not form part of the total income could not be debited to the profit or loss account in view of the provisions of Section 14A of the Act This constituted a clear fulfillment of the requirement in sub-section (2) of Section 14A as well as sub-rule (1) of Rule 8D that the AO was not satisfied with the correctness of the claim of the assessee, on the basis of the accounts of the assessee The order of the Tribunal to the extent to which it confirms the disallowance to the extent of ₹ 96,000/- is unexceptionable - The Tribunal has deleted the disallowance to the extent of ₹ 66.79 lacs on the ground that on this aspect the borrowed funds were used for business purposes and no part thereof was used for making investment and, hence, the interest expenditure could not be considered for proportionate disallowance under Rule 8D - The remaining disallowance of ₹ 96,000/- was on account of other expenditure - In making this allowance, representing 0.5% of the average value of the investment, the AO had applied the provisions of Rule 8D(iii) - The disallowance which was made in the aforesaid terms of ₹ 96,000/- has been confirmed by the Tribunal - the disallowance under Rule 8D(iii) which was made by the AO was entirely in consonance with the prescribed method and correctly affirmed by the Tribunal Decided against assessee.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Justification of disallowance by the Income Tax Appellate Tribunal.

Analysis:
1. The appeal before the High Court stemmed from a decision by the Income Tax Appellate Tribunal regarding a disallowance of Rs. 67.75 lacs made by the Assessing Officer under Section 14A of the Income Tax Act for the assessment year 2008-09. The Tribunal deleted a disallowance of Rs. 66.79 lacs and upheld a disallowance of Rs. 96,000. The main contention was whether the Tribunal was justified in determining the disallowance of Rs. 0.96 lac for other expenditures and adding it to the book profit under Section 14A without sufficient evidence or justification from the Assessing Officer.

2. The Assessing Officer applied Rule 8D of the Income Tax Rules to compute the disallowance, considering interest expenses directly related to exempt income and a proportionate disallowance based on the average value of investments. The CIT (A) deleted the disallowance, but the Tribunal confirmed a portion of it. The Tribunal reasoned that borrowed funds were solely used for business purposes, leading to the deletion of a significant part of the disallowance. The remaining disallowance of Rs. 96,000 was upheld due to other expenditures incurred by the assessee.

3. The High Court analyzed the provisions of Section 14A, which disallow deductions for expenditures related to income not forming part of the total income. It highlighted that the Assessing Officer must quantify the disallowance if unsatisfied with the assessee's claim, as per Section 14A(2). The Court emphasized that Rule 8D provides the method for determining such expenditures, requiring the Assessing Officer's dissatisfaction with the correctness of the claim based on the assessee's accounts.

4. The Court concluded that the Assessing Officer's order indicated dissatisfaction with the correctness of the assessee's claim, fulfilling the requirements of Section 14A and Rule 8D. The Tribunal's decision to confirm the disallowance of Rs. 96,000 was deemed appropriate, as it aligned with the prescribed method under Rule 8D. The judgment emphasized that the disallowance under Rule 8D(iii) was correctly affirmed by the Tribunal, leading to the dismissal of the appeal without raising substantial questions of law.

5. Ultimately, the High Court dismissed the appeal, stating that no substantial question of law arose from the case. The judgment upheld the Tribunal's decision regarding the disallowance under Section 14A and the computation of book profits under Section 115JB of the Act, with no order as to costs.