2015 (2) TMI 895 - AT - Income Tax

Disallowance u/s 14A - CIT(A) deleting the addition made u/s 14A on account of disallowance of expenditure incurred in earning dividend income - Held that - Once the Assessing Officer has any reason to doubt the expenditures and is not satisfied with the correctness of the claim of the assessee in respect of such expenditures in relation to the income which does not form part of the total income under the Income-tax Act, the Assessing Officer shall determine the amount of expenditures so incurred in accordance with such method as may be prescribed under rule 8D of the Rules. No option was given to the Assessing Officer to adopt different formula to compute the amount of expenditures incurred in relation to such income which does not form part of the total income under the Act. Only two options are left with the Assessing Officer - one is to accept the expenditures claimed by the assessee and if he disputes the same, he has to compute the expenditures by adopting the formula laid down in rule 8D of the Rules. Once provisions of section 14A of the Act are to be invoked, the disallowance is to be computed as per rule 8D of the rules. In the instant case, nothing has been brought on record to demonstrate that there was any incorrectness in the computation of disallowance as per rule 8D. It was simply contended that disallowance under section 14A of the Act cannot exceed the receipt of dividend income. This aspect has already been examined by us in the foregoing paragraphs. Since no dispute has been raised with regard to the computation of disallowance as per rule 8D, we find no infirmity therein and accordingly we confirm the order of the Assessing Officer after setting aside the order of the ld. CIT(A), as the ld. CIT(A) has granted relief to the assessee without looking to the mode of computation as per rule 8D of the rules. - Decided in favour of revenue.

Issues Involved:
1. Deletion of addition made under Section 14A of the Income Tax Act, 1961.
2. Application of Rule 8D of the Income Tax Rules, 1962.
3. Nexus between borrowed funds and investments.
4. Allowability of interest expenditure under different sections of the Income Tax Act.
5. Interpretation of relevant judicial precedents.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made Under Section 14A of the Income Tax Act, 1961:
The Revenue appealed against the deletion of Rs. 29,51,820/- made under Section 14A for disallowance of expenditure incurred in earning dividend income. The assessee argued that no direct expenses were incurred to earn the dividend income and relied on various judicial precedents to contend that disallowance cannot exceed the dividend income received. The CIT(A) was convinced by the assessee's explanations and deleted the addition, but the Revenue contended that disallowance under Section 14A is justified even if no dividend income is earned, citing the Supreme Court's decision in CIT vs. Rajendra Prasad Moody.

2. Application of Rule 8D of the Income Tax Rules, 1962:
The Tribunal examined the application of Rule 8D, which prescribes the method for determining the amount of expenditure incurred in relation to income not forming part of the total income. The Tribunal noted that the Assessing Officer (AO) correctly invoked Rule 8D after being unsatisfied with the assessee's claim. It was observed that the AO must follow the prescribed method under Rule 8D if the correctness of the claim is disputed. The Tribunal found that the AO's computation under Rule 8D was appropriate and did not warrant interference.

3. Nexus Between Borrowed Funds and Investments:
The Tribunal scrutinized the nexus between borrowed funds and investments. The CIT(A) had concluded that the investments were made out of profits from earlier years and not from borrowed funds. However, the Tribunal found no basis for this conclusion, noting that the assessee had a debit balance in the partners' capital accounts, indicating that the investments were financed through borrowed funds. The Tribunal emphasized that the assessee failed to establish that the interest-bearing funds were used for business purposes.

4. Allowability of Interest Expenditure Under Different Sections of the Income Tax Act:
The Tribunal analyzed the allowability of interest expenditure under Sections 36(1)(iii) and 57(iii) of the Income Tax Act. It concluded that interest expenditure is not allowable under Section 36(1)(iii) as the assessee could not prove that the borrowed funds were used for business purposes. Similarly, under Section 57(iii), interest expenditure is not allowable for computing capital gains or income from other sources, especially since dividend income is exempt from tax. The Tribunal held that the interest expenditure was not allowable under any provision of the Act.

5. Interpretation of Relevant Judicial Precedents:
The Tribunal considered various judicial precedents cited by both parties. It relied heavily on the Supreme Court's decision in CIT vs. Rajendra Prasad Moody, which established that expenditure incurred for earning income is deductible even if no income is earned. The Tribunal also referred to other decisions, such as those from the Punjab & Haryana High Court and the Bombay High Court, but found that these did not alter the applicability of Section 14A and Rule 8D in this case.

Conclusion:
The Tribunal concluded that the CIT(A)'s order was not sustainable as it was not based on the correct interpretation of law and facts. The Tribunal reversed the CIT(A)'s order and restored the AO's computation of disallowance under Section 14A read with Rule 8D. The appeal of the Revenue was allowed, emphasizing that the disallowance under Section 14A is justified regardless of whether dividend income is earned, and the computation under Rule 8D was appropriately applied by the AO.

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