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2015 (6) TMI 1188 - AT - Income TaxAddition u/s 14A - disallowance of expenditure incurred in earning dividend income - HELD THAT - Since the Tribunal has taken a view in the assessee s own case that once the provisions of section 14A of the Act are to be invoked, disallowance is to be computed as per rule 8D of the rules, we find no justification to take a contrary view in this appeal. The mode of computation as per rule 8D of the rules was also examined by the Tribunal in the case of Income Tax Officer vs. M/s Shruti Finsec Pt. Ltd. 2014 (11) TMI 172 - ITAT LUCKNOW in which it has been held that while adopting the procedure for computation of disallowance as per rule 8D of the rules, all aspects of direct and indirect expenses are to be considered Accordingly following the view taken by the Tribunal in assessment year 2009-10, we decide this issue in favour of the Revenue. Accordingly, the order of the ld. CIT(A) is set aside and that of the Assessing Officer is restored.
Issues Involved:
1. Disallowance of expenditure under Section 14A of the Income Tax Act, 1961. 2. Applicability of Rule 8D for computing disallowance. 3. Nexus between borrowed funds and investments. Issue-wise Detailed Analysis: 1. Disallowance of Expenditure under Section 14A of the Income Tax Act, 1961: The Revenue appealed against the order of the CIT(A) which deleted the addition of Rs. 28,98,891/- made under Section 14A on account of disallowance of expenditure incurred in earning dividend income. The assessee, a Public Limited company, had earned a dividend of Rs. 1,74,04,733/- during the year. The Assessing Officer disallowed 0.5% of the average value of investments as expenditure related to earning the dividend income. The CIT(A) deleted the disallowance based on previous judicial pronouncements and his earlier order for the assessment year 2009-10 in the assessee's own case. However, the Tribunal noted that in the assessment year 2009-10, it had reversed the CIT(A)'s order and restored the Assessing Officer's decision, emphasizing that disallowance under Section 14A can be made even if no dividend income is received. 2. Applicability of Rule 8D for Computing Disallowance: The Tribunal highlighted that once the provisions of Section 14A are invoked, the disallowance must be computed as per Rule 8D of the Income Tax Rules. The Tribunal referred to its previous decision in the assessee's case and other cases, asserting that the Assessing Officer must follow the prescribed method under Rule 8D if not satisfied with the correctness of the assessee's claim regarding the expenditure. The Tribunal found no evidence suggesting incorrectness in the computation of disallowance as per Rule 8D and emphasized that the CIT(A) granted relief without considering the computation method under Rule 8D. 3. Nexus between Borrowed Funds and Investments: The Tribunal examined whether the investments made by the assessee in sister concerns were for business purposes or business expediency. It concluded that merely having a business connection is insufficient to justify the investments as being for business purposes. The Tribunal reasoned that the investments were made to earn dividend income, which is not taxable, and thus, the interest expenditure on borrowed funds for such investments is not allowable under any provision of the Income Tax Act. The Tribunal noted that the CIT(A)'s finding lacked basis as the assessee failed to establish a direct nexus between borrowed funds and investments. Furthermore, the Tribunal observed that the assessee's funds were primarily from unsecured loans and sundry creditors, not from profits or capital contributions. Conclusion: The Tribunal set aside the order of the CIT(A) and restored the Assessing Officer's decision, emphasizing the necessity to compute disallowance as per Rule 8D when invoking Section 14A. It reiterated that interest expenditure on borrowed funds for non-taxable dividend income is not allowable under any provision of the Income Tax Act. The appeal of the Revenue was allowed, and the order was pronounced in the open court.
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