2015 (8) TMI 7 - AT - Income Tax

Disallowance u/s. 14A - Held that - With respect to disallowance of indirect interest as per Rule 8D(2)(ii) we find that the CIT(A), after considering the submissions of the Assessee has directed the A.O to work out the disallowance as directed by him in the order. Before us, ld. A.R. could not point out any fallacy or inconsistency of law in the directions of CIT(A) and therefore we find no reason to interfere as far as the disallowance on account of indirect interest is concerned. With respect to disallowance of administrative expenses as per Rule 8D(2)(iii) is concerned, assessee has submitted that it has incurred no expenses for earning the income but on the other hand ld. CIT(A) is of the view that the directors and other employees of the Assessee must be spending sufficient and energy in running day to day business and monitoring the business of the firms in which the Assessee is a partner. Before us, ld. A.R. has not placed any material on record like the ledger accounts of the firm, or any other material which could justify of not incurring of expenses including administrative expenses for earning tax free income. At the same time ld. CIT(A) has also presumed the spending of time and energy by the officials of the Assessee for running of the firms from which Assessee has earned tax free income. In view of the contrary submissions of both the parties before us and in the absence of any material on record, we are of the view that this aspect needs a factual verification and finding. We therefore remit the issue to the file of A.O to give a finding on the aforesaid and decide the issue afresh. - Decided partly in favour of assessee for statistical purposes.

Summary

Issues:
- Disallowance under section 14A of the Income Tax Act, 1961
- Treatment of assessee's share income from firms as tax exempt for the purposes of section 14A
- Quantification of disallowance out of interest expenditure

Analysis:

Issue 1: Disallowance under section 14A
The appellant, a company engaged in the construction business, filed its return for A.Y. 2008-09. The Assessing Officer (A.O.) noticed the intermingling of own and borrowed funds, leading to tax-free income from partnership firms. The A.O. applied Rule 8D to calculate the disallowance under section 14A. The CIT(A) upheld the disallowance, stating that the A.O. correctly applied the provisions of Section 14A. The appellant argued that no disallowance should be made as there was no nexus between borrowed funds and tax-free income. However, the CIT(A) disagreed, emphasizing the application of Rule 8D from A.Y. 08-09. The Tribunal found no fault in the CIT(A)'s decision regarding the disallowance of indirect interest under Rule 8D(2)(ii).

Issue 2: Treatment of tax-exempt share income
The appellant contended that the share income from firms should not be considered tax exempt for section 14A purposes. However, the Tribunal rejected this argument, stating that partnership firms are separate assessable entities, and income taxed in the hands of the firm cannot be deemed non-exempt income for partners.

Issue 3: Quantification of disallowance out of interest expenditure
The A.O. made errors in calculating the disallowance of interest under section 14A. The appellant raised objections regarding the calculation of average total assets, consideration of investment amounts, and exclusion of certain interest expenditures. The Tribunal partially accepted the appellant's submissions and directed the A.O. to correct the calculations accordingly.

Conclusion:
The Tribunal partially allowed the appeal for statistical purposes, remitting the issue of administrative expenses disallowance back to the A.O. for factual verification and decision. The A.O. was instructed to grant the Assessee a fair hearing and the Assessee was directed to provide necessary details. The Tribunal upheld the disallowance under section 14A and clarified the treatment of tax-exempt share income from partnership firms.