2014 (4) TMI 1261 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - disallowance of expenses being attributable to the earning of exempt income - CIT (Appeals) restricted the said disallowance to ₹ 1 lac as the provisions of Rule 8D of the Income Tax Rules were not applicable to the concerned year - HELD THAT - We find merit in the submissions made by the assessee that in view of non application of the provisions of Rule 8-D of the Income Tax Rules to the concerned assessment year, there is no merit in disallowance made by AO on the surmises that the assessee had borrowed funds in one hand and had invested in tax free assets on the other hand. We uphold the order of the CIT (Appeals) in disallowing ₹ 1 lac on account of administrative expenses as being attributable to the earning of tax free income. Similar disallowance of ₹ 1 lac in assessee s hands was made in the preceding year and the order of the Tribunal has been upheld by the Hon'ble Punjab Haryana High Court in CIT-I, Ludhiana Vs. M/s Vardhman Textiles 2013 (7) TMI 1127 - PUNJAB AND HARYANA HIGH COURT Following the same we uphold the order of the CIT (Appeals) and dismiss the grounds of appeal raised by the Revenue.

Summary

Issues:
- Disallowance of expenses for earning exempt income

Analysis:
The appeal before the Appellate Tribunal ITAT Chandigarh was filed by the Revenue against the Commissioner of Income Tax (Appeals)-II, Ludhiana's order related to the assessment year 2001-02 under section 143(3) of the Income Tax Act, 1961. The Revenue challenged the allocation of expenses of &8377; 1 lac instead of &8377; 31,21,953/- made by the Assessing Officer in earning exempted income. The key contention revolved around the disallowance of expenses attributable to earning exempt income. The assessee had earned dividend income exempt from tax, and the Assessing Officer disallowed a sum of &8377; 31,21,953/- as related to the exempt income. However, the CIT (Appeals) limited this disallowance to &8377; 1 lac since Rule 8D of the Income Tax Rules was not applicable for that assessment year.

In the absence of Rule 8D applicability for the concerned assessment year, the Tribunal found no merit in the disallowance made by the Assessing Officer based on the assumption that the assessee borrowed funds and invested in tax-free assets. The Tribunal upheld the CIT (Appeals) decision to disallow only &8377; 1 lac as administrative expenses attributable to earning tax-free income. It was noted that a similar disallowance of &8377; 1 lac was made in the preceding year, and the Tribunal's decision was confirmed by the Hon'ble Punjab & Haryana High Court. Therefore, the Tribunal dismissed the Revenue's appeal and upheld the CIT (Appeals) order, emphasizing the non-applicability of Rule 8D for the concerned assessment year.

In conclusion, the Tribunal's decision clarified the treatment of expenses related to earning exempt income, highlighting the importance of applicable rules and past precedents in determining the allowable disallowances. The judgment provided a clear rationale for limiting the disallowance to &8377; 1 lac and emphasized adherence to legal provisions and judicial decisions in such matters.