2016 (10) TMI 1270 - AT - Income Tax

Addition u/s 14A read with Rule 8D for earning exempted income - HELD THAT - As brought to our notice that the Hon ble Delhi High Court in the case of Joint investments Pvt. Ltd. Vs. CIT 2015 (3) TMI 155 - DELHI HIGH COURT has taken the view that the disallowance u/s 14A of the Act cannot exceed the exempt dividend income. In view of the aforesaid judicial pronouncement we are of the view that there is no merit in ground nos.1 and 2 raised by the Revenue. Disallowance of interest on loan which was not utilized for business purpose - HELD THAT - AO has accepted that the investments made out of borrowed funds in quoted shares as use of borrowed funds for the purpose of business of the company. However to the extent borrowed funds were used in making investments in unlisted/unquoted companies the AO has treated the same as not for the purpose of business of the Assessee. Such a distinction was rightly held by the CIT(A) to be not proper. We therefore do not find any merit in Gr.No.3 raised by the Revenue. The same is accordingly dismissed.

Summary

Issues:
1. Disallowance of expenses under Section 14A of the Income Tax Act, 1961.
2. Disallowance of interest on loan not utilized for business purpose.

Issue 1: Disallowance of expenses under Section 14A:
- The Assessing Officer (AO) disallowed expenses incurred in earning exempt dividend income of Rs. 83,13,550 under Section 14A read with Rule 8D, amounting to Rs. 1,20,82,774.
- The CIT(A) held that the disallowance cannot exceed the exempt income earned, relying on legal pronouncements and the decision of Hon'ble ITAT, Chandigarh.
- The CIT(A) restricted the disallowance to Rs. 83,13,550, aligning with the dividend income earned by the appellant during the assessment year.
- The Tribunal dismissed the Revenue's appeal, citing the decision of the Delhi High Court that the disallowance under Section 14A cannot exceed the exempt dividend income.

Issue 2: Disallowance of interest on loan not utilized for business purpose:
- The AO disallowed interest expenses of Rs. 8,62,668 on a pro-rata basis, as the funds were not used for the business purpose of the appellant.
- The CIT(A) deleted the disallowance, considering the main business activities of the appellant, including dealing in shares, leasing, and finance, and investments.
- The Tribunal upheld the CIT(A)'s decision, stating that the distinction made by the AO regarding the use of borrowed funds for investments in unlisted companies was not proper.

In conclusion, the Tribunal upheld the CIT(A)'s decision in both issues, dismissing the Revenue's appeal and allowing the appellant's contentions regarding the disallowances under Section 14A and interest on loans not utilized for business purposes.