2015 (6) TMI 329 - HC - Income Tax

Disallowance under Section 14A read with Rule 8D - ITAT deleted disallowance influenced by the fact that the assessee had not applied any borrowed fund towards the investment that yield exemption income - Held that - The AO s initially determined disallowance to the extent of ₹ 75,41,105/- as against the tax exemption income earned by the assessee of ₹ 25,77,300/-, was finally incorrect and excessive. It is based on misapplication of Rule 8D(2)(ii). The CIT(Appeal), to certain extent dealt with that misapplication but the fact remains that the tax exempt income of ₹ 25 lakhs was in effect brought to tax by disallowance of ₹ 37 lakhs. Moreover, the relevant component of the expenditure was on account of the interest paid by the assessee. The ITAT after examining the records has returned a clear finding that no interest element could be attributed to the earning of exempt income. No substantial question of law arises. - Decided against revenue.

Summary

Issues:
Dispute over disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961 in Assessment Year (AY) 2008-09.

Analysis:
In the case, the Revenue challenged the ITAT's decision accepting the assessee's plea regarding the disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961. The assessee, engaged in an independent business, declared income of about &8377; 1.5 crores, with a tax exemption income of &8377; 25 lakhs. The AO applied Rule 8D and added &8377; 75 lakhs to the income, which was partially confirmed by the CIT (Appeal). However, the ITAT set aside the CIT (Appeal)'s order, noting that no borrowed funds were used for the investment yielding the exemption income.

The Revenue contended that the ITAT's approach was incorrect, citing Rule 8D(2)(ii), and argued for restoring the CIT (Appeal)'s assessment. The High Court examined the submissions and found the initial disallowance by the AO to be incorrect and excessive, based on a misapplication of Rule 8D(2)(ii). Despite the CIT (Appeal) partially addressing this misapplication, the tax-exempt income of &8377; 25 lakhs was effectively taxed by a disallowance of &8377; 37 lakhs. Additionally, the ITAT found no interest element attributable to the earning of exempt income in the records.

Considering these findings, the Court declined to interfere with the ITAT's order, stating that no substantial question of law arose. Consequently, the appeal was dismissed.