2015 (11) TMI 1441 - AT - Income Tax

Disallowance of proportionate interest - AO disallowed interest paid to HDFC Bank on car loan on the basis that the assessee had made huge interest free advances - Held that - It is now a well established proposition of law that when assessee was having an adequate non-interest bearing fund disallowance of interest paid on borrowed fund cannot be made since in such a case there was no nexus between the advance given and borrowals made by the assessee. It is also not the case of the Assessing Officer that the loan was not taken for the business purposes. We thus while setting aside orders of the authorities below on the issue direct the Assessing Officer to delete the addition - Decided in favour of assessee. Disallowance under sec. 14A read with Rule 8D - Held that - Assessing Officer before invoking the provisions of Rule 8D has to record his satisfaction in terms of sub-section (2) of section 14A of the Act. In the present case when the assessee himself had disallowed the expenditure incurred on the management of its portfolio for earning the dividend income the Assessing Officer had to record his satisfaction first that the expenditure shown by the assessee for earning the dividend income was not satisfactory before invoking the provisions of section 14A of the Income-tax Act 1961 read with Rule 8D of the I.T. Rules to make disallowance there under. In absence of the compliance of such mandatory requirement the Assessing Officer was not justified in making the disallowanc under sec. 14A of the Act read with Rule 8D of the I.T. Rules. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of interest expenses on borrowed funds for higher purchase of car.
2. Disallowance made under sec. 14A read with Rule 8D.
3. Additional ground for disallowance under sec. 14A read with Rule 8D.

Issue 1: Disallowance of Interest Expenses on Borrowed Funds:
The assessee, a senior advocate, claimed interest expenses on a secure loan taken for a vehicle. The Assessing Officer disallowed &8377; 1,18,675 of the interest, citing huge interest-free advances made by the assessee. The Learned CIT(Appeals) upheld this disallowance. The assessee argued that since the advances were made from own capital, the disallowance was unwarranted. The Tribunal agreed, emphasizing that when adequate non-interest bearing funds are available, disallowance of interest on borrowed funds is unjustified. The disallowance was overturned, directing the Assessing Officer to delete the addition.

Issue 2: Disallowance under sec. 14A read with Rule 8D:
The Assessing Officer disallowed &8377; 2,97,684 under sec. 14A read with Rule 8D, upheld by the Learned CIT(Appeals). The assessee contended that the disallowance was incorrect as the exempt income was mistakenly calculated. The Tribunal noted that the Assessing Officer failed to establish unsatisfactory expenditure by the assessee before invoking Rule 8D. As the assessee had already disallowed expenses related to dividend income, the disallowance under sec. 14A was deemed unjustified. The Tribunal directed the Assessing Officer to delete the disallowance.

Issue 3: Additional Ground for Disallowance under sec. 14A read with Rule 8D:
The assessee sought to raise an additional ground challenging the disallowance under sec. 14A read with Rule 8D before the ITAT. The Tribunal rejected this, stating that as the issue was addressed by the CIT(Appeals), there was no need to raise it again. The Tribunal emphasized that the authorization of the counsel to withdraw the issue before the CIT(Appeals) would be considered separately. The application for the additional ground was dismissed.

In conclusion, the Tribunal allowed the appeal, overturning the disallowances of interest expenses on borrowed funds and under sec. 14A read with Rule 8D. The Tribunal directed the Assessing Officer to delete the additions made, emphasizing the need for proper justification and compliance with the law before disallowing expenses.