2015 (8) TMI 41 - AT - Income Tax

Disallowance u/s. 14A - Held that - As rightly pointed out before the AO as well as before us interest arrived at by the AO in the consequential order is pertaining to the banking operations which cannot be disallowed u/s. 14A. Infact in the assessment order AO accepted assessee contention. As seen from the amount of investment and sources of funds assessee has adequate funds for making the investment. Since no interest is attributable to the investments no disallowance is called for under Rule 8D(ii). Out of the treasury expenditure of 65, 50, 068/- attributable to this activity as per the earlier appellate orders only two months of treasury expenditure can be considered as directly attributable to exempt income. Accordingly the disallowance u/s. 8D(i) can be determined at 10, 91, 678/- as originally disallowed by assessee. That leaves with 8D(iii). One half percent of average value of investment as worked out by assessee comes to 1, 03, 35, 091/-. This amount only can be disallowed under Rule 8D(iii). Therefore since assessee has already disallowed an amount of 10, 91, 678/- further amount to be disallowed u/s. 14A r.w. Rule 8D is to an extent of 1, 03, 35, 091/-. AO is directed to modify the order accordingly. - Decided partly in favour of assessee.

Summary

Issues:
- Disallowance u/s. 14A of the Income Tax Act

Analysis:
1. The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-3, Hyderabad regarding the disallowance u/s. 14A of the Income Tax Act. The Assessing Officer (AO) determined the total income at a different amount compared to the returned income, with a major addition being the disallowance u/s. 14A due to exempt income earned by the assessee.

2. The AO disallowed a specific amount based on the ratio of operating expenditure and interest expenditure to the total revenue, resulting in a disallowance of a significant sum. The assessee contested this before the Ld.CIT(A), who directed the assessee to furnish a calculation of disallowance as per rule 8D, which led to a revised disallowance amount.

3. The AO, in a consequential order, arrived at a different proportionate expense amount, leading to the matter being taken to the Ld.CIT(A) again. The Ld.CIT(A) upheld the disallowance, citing the applicability of Section 14A r.w.r. 8D, and dismissed the appeal.

4. During the appeal, the assessee argued that disallowance u/s. 14A was not sustainable as the investments were made from non-interest bearing funds. The assessee also highlighted the adequacy of funds for investments and relied on specific judgments to support their stance.

5. The Tribunal analyzed the details on record and found discrepancies in the disallowance calculations made by the AO. The Tribunal emphasized that the AO exceeded the powers granted by the Ld.CIT(A) in determining the disallowance amount, and the disallowance should be limited to specific criteria under Rule 8D.

6. The Tribunal concluded that the disallowance should be based on specific calculations and directed the AO to modify the order accordingly. The appeal was allowed partly, with specific amounts to be disallowed under Rule 8D(i) and (iii) for proper compliance with Section 14A of the Income Tax Act.