2015 (12) TMI 1021 - AT - Income Tax

Disallowance made u/s 14A r.w. Rule 8D(2)(ii) - CIT(A) had directed the AO to re-compute disallowance - Held that - A look at the balance sheet of the assesee placed show that its share capital of ₹ 21,19,01,000/- and reserves and surplus of ₹ 17,81,28,688/- totaling to ₹ 39,00,29,688/-. Its investments as on 31-03-2011 were only ₹ 13,01,27,472/-. Obviously, assessee had more than enough own funds with it for justifying the investment. Further, it is not disputed that the assessee had made a suo-motu disallowance of ₹ 56,55,867/- as the interest expenditure attributable to the loan fund utilized for the investment. At no place the AO expressed any dissatisfaction with regard to the correctness of the claim of the assessee with regard to expenditure incurred for earning exempt income. Assessee had all along argued that the loans which were used were only for the purpose of its business. The loans which were used for the purpose of placing investments resulting in tax free income were also furnished by the assessee and this totalled only to ₹ 18,90,931/-. The CIT(A) directed the AO to confine the disallowance under Rule 8D(2)(ii) of the IT Act, 1961 to such amount which is justified - Decided against revenue

Summary

Issues:
- Disallowance made under section 14A of the IT Act, 1961 r.w. Rule 8D(2)(ii) of the IT Rules.
- Correctness of disallowance calculation by the Assessing Officer (AO).
- Appeal against the order of the Commissioner of Income Tax (Appeals) [CIT(A)] directing re-computation of disallowance.

Analysis:
1. The appeal by the revenue was against the CIT(A)'s order directing the AO to re-compute the disallowance under section 14A of the IT Act, 1961 r.w. Rule 8D(2)(ii) of the IT Rules. The AO had noted that the assessee, a dealer in motor cars and spares, had earned dividend income claimed as exempt. The AO re-computed the disallowance, including interest expenses and a percentage of the value of investments, resulting in a significant disallowance amount.

2. The assessee contended that similar disallowances were made in previous assessment years, but the CIT(A) had deleted them. The CIT(A) appreciated the arguments and directed the AO to consider only a specific amount as indirect interest expenditure for the disallowance calculation under Rule 8D(2)(ii) of the IT Act. This decision was based on the adequacy of the assessee's own funds in justifying the investments made.

3. During the appeal, the revenue strongly challenged the CIT(A)'s order, arguing that the assessee failed to provide evidence of utilizing loans for business purposes. The revenue insisted on applying Rule 8D(2)(ii) regardless of actual loan utilization. However, the assessee and CIT(A) maintained that the AO should only disallow the specified amount as indirect interest expenditure based on the Tribunal's previous decisions and the balance sheet details.

4. The Tribunal analyzed the balance sheet and the loans utilized for investments, concluding that the assessee had sufficient own funds to support the investments. The Tribunal emphasized that the AO did not express dissatisfaction with the expenditure claim by the assessee. Referring to previous Tribunal orders, the Tribunal affirmed the CIT(A)'s decision to restrict the disallowance to a proportionate amount, in this case, Rs. 18,90,931, under Rule 8D(2)(ii) of the IT Act, 1961.

5. Ultimately, the Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decision to limit the disallowance amount. The judgment highlighted the importance of assessing the adequacy of own funds for investments and the necessity for the AO to be unsatisfied with the expenditure claim before applying disallowance rules.