2018 (3) TMI 1757 - AT - Income Tax

Disallowance u/s 14A - interest attributable to other activities - attributing expenses towards earning of tax free income - HELD THAT - In the present case, no exercise to segregate the interest attributable to other activities has been done and the entire interest has been apportioned by applying the ratio. It has been held in number of cases that application of Rule 8D is not automatic (CIT vs. I.P support services (P) Ltd.- 2015 (10) TMI 752 - DELHI HIGH COURT ) and this is not the only repository for attributing expenses towards earning of tax free income. The Rule is to be applied where in the opinion of the A.O inadequate amount of expense has been attributed and the nature of tax free income is such against which expenses cannot be calculated except by resorting to Rule 8D. Disallowance of expenses related to tax free income made by the appellant is ₹ 2,62,459/- which is about 25% of the tax free income of ₹ 10,76,533/-. Find the expense already disallowed as sufficient to cover the requirement of Section 14A and Rule 8D. The ground of appeal is allowed. - Decided against revenue.

Summary

Issues:
1. Disallowance of expenses under Section 14A of the Income Tax Act, 1961.
2. Interpretation of Rule 8D in relation to disallowance of expenses.
3. Application of CBDT Circular No.5 of 2014 regarding disallowance under Rule 8D.

Issue 1: The main issue in this case was the disallowance of expenses under Section 14A of the Income Tax Act, 1961. The Assessing Officer disallowed a specific amount, which was challenged by the appellant before the CIT(A). The appellant argued that no further disallowance should be made based on various grounds, including the source of investment and the application of Section 14A and Rule 8D. The CIT(A) granted relief to the appellant after considering the arguments and relevant legal precedents.

Issue 2: The interpretation of Rule 8D in relation to the disallowance of expenses was a crucial aspect of this case. The CIT(A) emphasized that Rule 8D is not attracted to all assesses with exempt income and is not mandatory for voluntary computation. The CIT(A) referred to legal precedents such as Maxopp Investment Ltd. v. CIT and Godrej & Boyce Mfg. Co. Ltd. v. CIT to support the position that the Assessing Officer must first examine the claim of the assessee before resorting to Rule 8D. The CIT(A) also highlighted the proportionality principle in disallowing expenses related to tax-exempt income.

Issue 3: The application of CBDT Circular No.5 of 2014 regarding disallowance under Rule 8D was also a point of contention. The circular clarified that disallowance under Rule 8D should be made even if the taxpayer has not earned any exempt income in a particular year. However, the CIT(A) in this case considered the specific facts and held that the expenses already disallowed were sufficient to cover the requirements of Section 14A and Rule 8D. The CIT(A) found no need for further disallowance based on the circumstances of the case.

In conclusion, the appellate tribunal upheld the decision of the CIT(A) and dismissed the revenue's appeal. The tribunal found no grounds to interfere with the relief granted by the CIT(A) based on the facts presented and the legal position established in relevant judgments.