2016 (5) TMI 1533 - AT - Income Tax

Disallowance of expenditure u/s 14A - assessee accounted dividend income during the year under consideration which was exempted u/s 10(35) - AO by applying third limb of Rule 8D of the Income-tax Rules, disallowed 0.5% of the average investment which yielded the exempted income - as per AR no expenditure was incurred for earning the exempted income - HELD THAT - It is nobody s case that the assessee has borrowed any loan for the purpose of making investment, therefore, the first limb of Rule 8D may not be applicable. No material is available on record to suggest that the assessee has incurred any interest expenditure which are not directly attributable to any particular income or receipt. Second limb of Rule 8D is also not applicable. Now coming to third limb of Rule 8D, an amount equal to 0.5% of the average value of the investment, income from which does not or shall not form part of the total income as appearing in the balance sheet of the assessee as on the first day and last day of the previous year, has to be considered for disallowance. In this case, AO has considered the investments which are appearing in the balance sheet as on the first day and last day of the previous year and taken the income which was not formed part of the total income. Therefore, this Tribunal is of the considered opinion that the Assessing Officer has rightly applied third limb of Rule 8D for making the disallowance. - Decided against assessee.

Summary

Issues: Disallowance of expenditure u/s 14A

Analysis:
The appeal was against the order of the Commissioner of Income-tax (Appeals) for the assessment year 2010-11, focusing on the disallowance of expenditure under section 14A. The assessee argued that no expenditure was incurred for earning the exempted income of &8377;1,21,166, which was exempted u/s 10(35) of the Act. The Assessing Officer had applied the third limb of Rule 8D to disallow 0.5% of the average investment generating the exempted income. The assessee contended that section 14A is only applicable if actual expenditure was incurred for earning tax-free income, which was not the case here. On the other hand, the Departmental Representative argued that Rule 8D mandates disallowance of expenditure related to earning exempted income, and since the assessee earned tax-exempt income, the expenditure incurred for such income had to be computed as per Rule 8D. The Tribunal observed that the first and second limbs of Rule 8D were not applicable as there was no evidence of borrowed funds or interest expenditure not directly attributable to any income. However, the third limb, requiring 0.5% of the average value of investments yielding tax-exempt income to be considered for disallowance, was found applicable. The Tribunal upheld the decision of the Assessing Officer and Commissioner of Income-tax (Appeals), confirming the disallowance under Rule 8D for the assessee. Consequently, the appeal was dismissed, and the order was pronounced on 12th May 2016 in Chennai.