2015 (10) TMI 1703 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - whether no expenditure was incurred in earning of exempt income? - Held that - On the facts and circumstances of the present case, the Ld. CIT(A) held that investment would have been made out of common/mixed funds, and therefore the ld. AO has worked out the disallowance at ₹ 26,40,830/- on a proportionate basis with reference to investment of ₹ 166.50lacz out of total interest of ₹ 576.40 lacs paid on account of cash credits. The ld. CIT(A) should have passed a speaking order dealing with contentions of parties in specific terms with facts and figure. The decision of Hon ble Delhi High Court in the case of Maxopp Investments, reported 2011 (11) TMI 267 - Delhi High Court , are very much relevant on the issue of working of disallowance u/s.14A r.w.Rule 8 D by the ld. A.O. We thus following the decision of the coordinate bench in assessee s own case for assessment year 2009-10, set aside the issue back to the file of A.O to decide the disallowance of expenses u/s.14A r.w. Rule 8 D on the investments of shares in question as per the law, keeping in view the guidelines provided for the same in the case of Maxopp (supra), after affording opportunity of being herd to the assessee. - Decided in favour of assessee for statistical purposes

Issues involved:
1. Disallowance of expenses under section 14A of the Income Tax Act.
2. Disallowance of interest expenditure.
3. Investment made from common funds.
4. Applicability of Rule 8D for disallowance of expenses.
5. Lack of separate account for investments.

Issue 1: Disallowance of expenses under section 14A of the Income Tax Act:
The appellant contested the disallowance of Rs. 26,40,830 made by the Assessing Officer under section 14A of the Income Tax Act. The appellant argued that no expenditure was incurred in earning exempt income and that the amount of Rs. 2,00,000 offered was reasonable. However, the CIT(A) upheld the disallowance without appreciating the appellant's submissions. The Tribunal noted that the investments were made from common funds, leading to the disallowance being worked out on a proportionate basis. Following the decision in a previous case, the Tribunal set aside the issue for the Assessing Officer to decide the disallowance of expenses on the investments.

Issue 2: Disallowance of interest expenditure:
The disallowance of interest expenditure was calculated based on the average value of investments and total assets. The appellant argued that no evidence was produced to show that shares were acquired from own funds and profits, despite submitting details and documents. The Tribunal observed that the majority of interest payments related to secured loans and facilities availed by the appellant, leading to the confirmation of the addition by the CIT(A).

Issue 3: Investment made from common funds:
The appellant claimed that investments in certain companies were made from profits generated by the company. However, the CIT(A) found that funds borrowed for working capital and expansion purposes were kept in a common account, with no separate account for investments. The Tribunal agreed that investments were made from common funds, leading to the confirmation of the disallowance by the CIT(A).

Issue 4: Applicability of Rule 8D for disallowance of expenses:
The Tribunal referred to a decision by the High Court, emphasizing the importance of a speaking order dealing with contentions of parties in specific terms with facts and figures. The Tribunal set aside the issue for the Assessing Officer to decide the disallowance in accordance with the law and guidelines provided, following the decision in a relevant case.

Issue 5: Lack of separate account for investments:
The lack of a separate account for investments proved crucial in determining that the investments were made from common funds. The Tribunal highlighted the need for clear documentation and segregation of funds to establish the source of investments. The decision to set aside the issue for further assessment by the Assessing Officer was based on this lack of clarity regarding the source of funds for investments.

This detailed analysis of the judgment highlights the key issues involved in the case and the Tribunal's decision on each issue, providing a comprehensive overview of the legal proceedings and outcomes.

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