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2019 (4) TMI 1900 - AT - Income TaxDisallowance of interest u/s 14A - CIT- A deleted addition - HELD THAT - Though AO has accepted the methodology of calculation of disallowance of interest but he has considered the net worth of investment as deductible amount from the total investment. It is a settled proposition of law that if the assessee has interest free funds available with it, then, it can be safely presumed that investments have been made out of interest free funds available No merit in the computation of disallowance of interest made by the AO - approach of adopting net worth cannot be accepted as interest free available funds available with the assessee should be given set off against the investments and then only the proportionate interest needs to be disallowed as per the computation of disallowance made by the assessee mentioned elsewhere. Secondly, as mentioned elsewhere, Rule 8D of the Rules is not applicable for the year under consideration and, therefore, no weightage can be given to the methodology given u/r 8D of the Rules for the year under consideration. Similar methodology has been accepted by the revenue in earlier A.Ys and following the Rule of Consistency, as enunciated in the case of Radha Soami Satsang 1991 (11) TMI 2 - SUPREME COURT the Assessing Officer ought to have followed the findings in the earlier A.Ys. No error or infirmity in the findings of the CIT(A). Suo moto disallowance in respect of administrative expenses - CIT-A confirmed disallowance - HELD THAT - AO has computed the disallowance as per Rule 8D of the Rules, which we have already held to be not applicable for the year under consideration. All that has to be considered is whether the disallowance made by the assessee is reasonable qua the facts of the case. In our considered opinion and after considering the computation as mentioned elsewhere, the suo moto disallowance @ 10% is reasonable and cannot be faulted with. We, accordingly, set aside the findings of the CIT(A) and direct the Assessing Officer to accept the suo moto disallowance. Assessee appeal allowed.
Issues:
1. Disallowance of Administrative and Personnel expenses under section 14A of the Income-tax Act, 1961. 2. Disallowance of interest under section 14A of the Act. Analysis: 1. The Appellate Tribunal heard cross-appeals by the assessee and revenue against the Commissioner of Income Tax [Appeals] order for assessment year 2006-07. The assessee contested the disallowance of ?1.97 crores on Administrative and Personnel expenses under section 14A of the Act, while the Revenue challenged the deletion of ?7.30 crores disallowance on interest under section 14A. Both appeals were disposed of together for convenience. 2. The appellant company, engaged in non-banking finances, earned ?86.88 crores from dividends, claimed exempt under section 10(34) of the Act. The assessee allocated ?55.59 crores for earning this dividend income under section 14A. The Assessing Officer disallowed ?62.68 crores citing sections 14A(2) and 14A(3) and Rule 8D of the Rules. 3. The Tribunal noted Rule 8D applied from A.Y. 2008-09 per Supreme Court ruling. The Court emphasized disallowing expenses related to non-taxable income. The assessee's disallowance summary showed ?55.59 crores, including ?55.37 crores for interest and ?21.89 lakhs for administrative expenses. 4. The Tribunal found the Assessing Officer's net worth approach flawed, as interest-free funds should offset investments before disallowance. The Tribunal upheld the assessee's methodology, citing consistency in earlier A.Ys and rejecting Rule 8D for the relevant year. 5. The Revenue's appeal was dismissed, affirming the CIT(A)'s decision on interest disallowance. The Tribunal found no error in the CIT(A)'s findings. 6. Regarding the assessee's appeal, the suo moto disallowance of ?21.89 lakhs for administrative expenses was deemed reasonable at 10%. The Tribunal directed the Assessing Officer to accept this disallowance. 7. In conclusion, the assessee's appeal was allowed, while the Revenue's appeal was dismissed. The Tribunal pronounced the order on 03.04.2019.
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