2015 (7) TMI 763 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - CIT(A) restricted the addition to ₹ 1 lakh - Held that - We are in agreement with the conclusion of the CIT(A) that as per decision of Hon ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT (2010 (8) TMI 77 - BOMBAY HIGH COURT) the Rule 8D of the Rules is applicable from A.Y. 2008-09 onwards and the AO was not justified in invoking Rule 8D for making impugned disallowance. We are also in agreement with the conclusion of CIT(A) that even when Rule 8D of the rules is not applicable in the present case of the assessee pertaining to A.Y. 2006-07 but at the same time it cannot be denied that the assessee has a tax free dividend income on which some part of the expenses would have been incurred and which is otherwise disallowable u/s 14A of the Act. With these observations the CIT(A) concluded and restricted the disallowance to the extent of ₹ 1 lakh. While we analyze the chart given in regard to interest paid by the assessee we note that the interest paid to the partners on their capital is ₹ 88,94,929/- and interest paid towards security deposits overdraft facility loan on vehicles late payments and bank charges comes to ₹ 1,01,37,215/- and after deducting interest received by the assessee on fixed deposit of ₹ 21,03,300/- the net interest debited in the profit and loss account comes to ₹ 80,33,915/- and these figures have not been disputed by the ld. DR. In this situation, while the assessee has earned dividend income on equity shares amounting to ₹ 11,32,575/- and on mutual funds of ₹ 9,51,042/- then interest paid to bank on overdraft facility amounting to ₹ 3,38,505/- and bank charges of ₹ 2,46,968/- may be related expenses of business activities of the assessee which also includes investments which brings tax free dividend income to the assessee. Therefore, in totality of the facts and circumstances, we are of the considered view that the invocation of Rule 8D of the Rules by the AO was an incorrect action which was rightly corrected by the CIT(A) restricting the disallowance u/s 14A of the Act to the extent of ₹ 1 lakh. We are unable to see any infirmity or any other valid reason to interfere with the impugned order and we upheld the same in toto. - Decided against revenue and assessee.

Summary

Issues:
1. Disallowance of interest expenditure under section 14A of the Income-tax Act, 1961.
2. Applicability of Rule 8D of the Income-tax Rules, 1962 for the assessment year 2006-07.
3. Correctness of disallowance made by the Assessing Officer and relief granted by the Commissioner of Income Tax (Appeals).

Analysis:
1. The case involved a dispute regarding the disallowance of interest expenditure amounting to Rs. 1,00,000 under section 14A of the Income-tax Act, 1961. The Assessing Officer had calculated a disallowance of Rs. 15,35,233 under Rule 8D, which was partially confirmed by the Commissioner of Income Tax (Appeals) and restricted to Rs. 1,00,000. The main argument was whether the disallowance was justified and whether Rule 8D was applicable for the assessment year 2006-07.

2. The Tribunal noted that Rule 8D of the Income-tax Rules, 1962 was not applicable for the assessment year 2006-07, as it came into effect from the assessment year 2008-09 onwards. The case revolved around the disallowance of interest expenditure related to tax-free dividend income declared by the assessee. The Tribunal agreed with the Commissioner of Income Tax (Appeals) that the Assessing Officer was not justified in invoking Rule 8D for making the disallowance, considering the assessment year in question.

3. The Tribunal examined the interest payments made by the assessee and found that certain expenses could be related to the business activities, including investments that generated tax-free dividend income. The Tribunal concluded that the invocation of Rule 8D by the Assessing Officer was incorrect, and the relief granted by the Commissioner of Income Tax (Appeals) limiting the disallowance to Rs. 1,00,000 was appropriate. The Tribunal upheld the decision of the Commissioner of Income Tax (Appeals) and dismissed the appeals of both the Revenue and the assessee.

In conclusion, the Tribunal clarified the applicability of Rule 8D, addressed the correctness of the disallowance of interest expenditure, and upheld the decision of the Commissioner of Income Tax (Appeals) regarding the limitation of the disallowance under section 14A of the Income-tax Act, 1961.