2016 (3) TMI 1386 - AT - Income Tax

Disallowance u/s 14A - indirect expenses of the dividend income - HELD THAT - As noted that for A.Y. 2009-10 also, there is observation that the entire investment was made out of own funds and simply because the assessee had borrowed funds in the balance sheet does not mean that the assessee made investment out of borrowed capital. As further observed that the assessee made disallowance at the rate of 1%, which was considered to be towards lower side, therefore, the AO was directed to restrict the disallowance on account of indirect expenses at the rate of 5% of the dividend income and since the assessee had suomotu disallowed the Assessing Officer was directed to restrict the disallowance at ₹ 4,14,921/-. The ld. DR had also no objection to the aforesaid reasoning, if followed. - Appeal of the assessee is partly allowed.

Summary

Issues: Disallowance under section 14A of the Income Tax Act, 1961

Detailed Analysis:
The judgment by the Appellate Tribunal ITAT Mumbai involved the issue of disallowance under section 14A of the Income Tax Act, 1961. The assessee was aggrieved by the order of the ld. First Appellate Authority, Mumbai, which disallowed a sum of ?1,38,29,156 under section 14A of the Act read with rule 8D against the dividend income of ?70,03,835. The main contention raised in the appeal was regarding this disallowance.

In a previous case for A.Y. 2009-10, the Tribunal had considered a similar issue where the disallowance made by the Assessing Officer invoking Rule 8D was contested by the assessee. The Tribunal in that case observed that the entire investments were made out of own funds, and just because the assessee had borrowed funds in the balance sheet did not mean that the investments were made out of borrowed capital. The Tribunal directed the Assessing Officer to restrict the disallowance on account of indirect expenses at the rate of 5% of the dividend income, resulting in a reduced disallowance amount. The ld. DR had no objection to this reasoning.

During the hearing for the current assessment year, the assessee requested that the reasoning from the previous order be followed. The assessee argued that the investments were made from own funds, and the disallowance made at 1% was on the lower side. The Tribunal directed the Assessing Officer to restrict the disallowance accordingly, following the reasoning from the previous case. The ld. DR did not object to this approach. As a result, the appeal of the assessee was partly allowed in the current case as well.

In conclusion, the Appellate Tribunal ITAT Mumbai, comprising Shri Joginder Singh, Judicial Member, and Shri Rajendra, Accountant Member, partially allowed the appeal of the assessee concerning the disallowance under section 14A of the Income Tax Act, 1961, based on the principles established in a previous case for A.Y. 2009-10.