2018 (2) TMI 1974 - AT - Income Tax

Disallowance u/s 14A - Disallowance of interest expenses u/s 36(1)(iii) - CIT-A deleted the addition - HELD THAT - The assessee has proved that all the scripts were held as stock in trade and there was no investment, therefore, Rule 8D will not be applicable in the present case. From the records, it also reveals that the same is just and proper as related to disallowance of interest expenses u/s 36(1) (iii) interest on funds utilized in buying securities for earning exempt income is not there in the Income Tax Act only interest is paid for a funds for non business purposes can be disallowed. Thus, the CIT(A) has given a detailed finding and there is no need to interfere with the same. Therefore, the appeal filed by the Revenue is dismissed.

Summary

Issues:
1. Disallowance under Section 14A
2. Disallowance of interest expenses under Section 36(1)(iii)

Analysis:

1. Disallowance under Section 14A:
The appellant, a Non Banking Financial Corporation (NBFC), filed its return of income for Assessment Year 2010-11, declaring income under normal provisions and Section 115JB of the Income Tax Act, 1961. During scrutiny, the Assessing Officer disallowed &8377; 53,49,000 as expenses attributable to exempt income under Section 14A. The CIT(A) partly allowed the appeal, restricting the disallowance to &8377; 12,50,000. The appellant argued that all securities were held as stock in trade, not investments, and thus Rule 8D would not apply. The CIT(A) agreed, stating that since there were no direct expenses related to earning exempt income, only a nominal disallowance of &8377; 12.5 lakhs was justified, based on 0.5% of the average value of investments. The appeal of the Revenue was dismissed as the CIT(A) provided a detailed finding supporting the decision.

2. Disallowance of Interest Expenses under Section 36(1)(iii):
The Assessing Officer disallowed &8377; 22,87,000 as excessive interest payment under Section 36(1)(iii) due to funds used for investments other than business purposes. The CIT(A) ruled in favor of the appellant, stating that the Income Tax Act does not allow disallowance of interest on funds utilized for buying securities to earn exempt income. The CIT(A) emphasized that interest can only be disallowed if paid for non-business purposes. The detailed findings of the CIT(A) supported the appellant's case, leading to the dismissal of the Revenue's appeal.

In conclusion, the ITAT Delhi upheld the CIT(A)'s decision, dismissing the Revenue's appeal against the order restricting disallowances under Section 14A and Section 36(1)(iii) for the appellant, a NBFC, for Assessment Year 2010-11. The judgment clarified the application of Rule 8D and the conditions for disallowance of interest expenses under the Income Tax Act, providing a comprehensive analysis of the issues raised in the appeal.