2017 (12) TMI 1592 - HC - Income Tax

Disallowance u/s 14A - AO applied the formula indicated in Rule 8D (ii) & (iii) of the Income Tax Rules - CIT (A) granted partial relief after analysing the decision but upholding the rejection of the disallowance by the AO offered by the assessee. The ITAT in the impugned judgment granted complete relief to the assessee - Held that - entire exempt income in the present case was purely incidental consequent of the deployment of surplus funds for a part of the period. The findings of the CIT (A) clearly point to the fact that the assessee had utilised the entire borrowed funds for the purpose of setting up of its plan and undertaking the industrial activity. In these circumstances the disallowance offered - of the entire exempt income - could not have been reasonably rejected. - Decided against the revenue.

Summary

Issues involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.

Detailed Analysis:
The High Court of Delhi heard an appeal by the revenue challenging the decision of the Income Tax Appellate Tribunal (ITAT) that provided complete relief to the assessee in a case involving disallowance under Section 14A of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) had initially reduced the disallowance made by the Assessing Officer (AO) from over ?9 crores to just over ?76 lakhs. The AO had disallowed an amount of over ?9.28 crores by applying the formula in Rule 8D (ii) & (iii) of the Income Tax Rules, rejecting the disallowance offered by the assessee, who had voluntarily offered just over ?1.75 lakhs as disallowance under Section 14A.

The assessee, engaged in power generation, had borrowed funds from financial institutions to service equipment and machinery for setting up a plant. Some surplus funds were invested during the plant setup, generating exempt income. The AO's rejection of the disallowance offered by the assessee was based on the lack of reasonable nexus with actual expenditure. The CIT (A) partially upheld the AO's decision but reduced the disallowance amount. The ITAT, citing previous court judgments, granted complete relief to the assessee, emphasizing the incidental nature of the exempt income from surplus funds deployment during the industrial activity.

The High Court noted that the entire exempt income was incidental to the surplus funds' deployment for the plant setup and industrial activity. It emphasized that the rejection of the disallowance offered by the assessee must be reasonable and cannot automatically lead to applying Rule 8D principles. In this case, the rejection by the AO was deemed unreasonable, leading to the dismissal of the revenue's appeal as no substantial question of law arose from the matter. The judgment highlighted the importance of reasonableness in rejecting disallowances and applying tax rules appropriately.