2014 (3) TMI 1128 - AT - Income Tax

Disallowance made u/s 14A - Held that - Where the assessee had incurred interest expenditure which is set-off against the interest income offered under the head income from other sources and where no interest expenditure is remaining to be set off there is no merit in the orders of the authorities below in making the disallowance under section 14A in line with Rule 8D(ii) of the IT Rules. The assessee during the year under consideration had earned dividend income of 305, 730/- against which disallowance of 39, 80, 707/- was made by invoking the provisions of section 14A of the Act. We delete the addition made under section 14A read with Rule 8D(ii) at 33, 08, 071/-. In view of the assessee having incurred various expenditures the disallowance warranted under Rule 8D(iii) at % of the average of the value of investment at 672, 635/- is upheld. The grounds of appeal No. 1 to 4 raised by the assessee are thus partly allowed.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act.
2. Charging of interest under section 234B of the Act.

Issue 1: Disallowance under section 14A of the Income Tax Act:

The case involved an appeal against the disallowance of &8377; 39,80,707 made under section 14A of the Income Tax Act. The Assessing Officer computed the disallowance based on Rule 8D of the IT Rules, considering the interest expenditure incurred by the assessee against tax-free dividend income. The Commissioner of Income Tax (Appeals) upheld the disallowance, emphasizing that the investments were made using borrowed funds, even though the assessee claimed they were from interest-free funds. However, the assessee argued that the investments were made from their own capital and that no interest expenditure remained to be set off against income from other sources. The Tribunal found merit in the assessee's argument, deleting the disallowance under Rule 8D(ii) but upholding a partial disallowance under Rule 8D(iii) at &8377; 672,635. Thus, the appeal on this issue was partly allowed.

Issue 2: Charging of interest under section 234B of the Act:

The fifth ground of appeal challenged the charging of interest under section 234B of the Act. The Tribunal considered this issue as consequential and dismissed the appeal related to the interest charged under section 234B. Consequently, the appeal of the assessee was partly allowed in this regard.

In conclusion, the Tribunal partially allowed the appeal concerning the disallowance under section 14A of the Income Tax Act, deleting the disallowance under Rule 8D(ii) but upholding a partial disallowance under Rule 8D(iii). The appeal challenging the charging of interest under section 234B was dismissed.