2014 (9) TMI 1255 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - borrowed funds were also utilised partly by the assessee for making tax free investments and the disallowance to be made u/s 14A was required to be computed as per clause (ii) and (iii) of Rule 8D(2) - CIT(A) held that the said disallowance on account of interest made by the Assessing Officer based on the quantum of investment was correct and the same was accordingly confirmed by the learned CIT(A) - HELD THAT - At the time of hearing before us the learned Departmental Representative has not been able to rebut or controvert the findings recorded by the learned CIT(A) which formed the basis of relief allowed by him to the assessee. We therefore find no justifiable reason to interfere with the impugned orders of the learned CIT(A) in directing the Assessing Officer not to consider the interest paid by the assessee on the loans borrowed after the financial year 2005-06 and also the interest directly relating to any other taxable income while computing the disallowance under Rule 8D(2). The same are accordingly upheld on this issue and the appeals of the Revenue are dismissed. Mandation of recording satisfaction - Correctness of the claim of the assessee of having not incurred any expenditure for earning the exempt income - No details were filed by it showing the basis for working out the disallowance at 1-lakh offered under S.14A. A perusal of the assessment order also shows that the issue of other expenses indirectly attributable to the earning of exempt income was not separately discussed by the Assessing Officer and there was no finding given by him on this aspect. Although the learned CIT(A) has observed in his impugned order that dissatisfaction was recorded by the Assessing Officer as regards the correctness of the claim of the assessee of having not incurred any expenditure for earning the exempt income we find that there is no such finding specifically recorded by the Assessing Officer in the assessment order. As already noted by us the assessee has also taken contradictory stand on this issue and in the absence of any details filed by it giving the basis of disallowance of 1 lakh offered in the computation of total income there was no occasion for the Assessing Officer to record his satisfaction or dissatisfaction about the correctness of the claim of the assessee on this aspect. Having regard to all these facts of the case clearly borne out from the record we are of the view that it would be fair and proper to restore this matter to the file of the Assessing Officer for deciding the same afresh in accordance with law after giving the assessee a proper and sufficient opportunity of being heard. Accordingly the impugned order of the learned CIT(A) on this issue is set aside and the matter is restored to the file of the Assessing Officer for deciding the issue in relation to the disallowance to be made under S.14A on account of other expenses as per Rule 8D(2)(iii) afresh. The appeals of the assessee are accordingly treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962.
2. Application of Rule 8D for computing disallowance under Section 14A.
3. Allocation of interest expenses for earning exempt dividend income.
4. Disallowance of administrative and other expenses indirectly attributable to earning exempt income.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962:
The assessee, a company involved in investment and industrial finance, claimed exemption on dividend income under Section 10(34) for the assessment years 2008-09, 2009-10, and 2010-11. The Assessing Officer (AO) noted that the assessee had claimed interest deductions and required explanations for not disallowing any expenditure on account of interest and administrative expenses for earning exempt dividend income. The AO computed disallowance under Section 14A by applying Rule 8D, resulting in significant disallowances for each assessment year.

2. Application of Rule 8D for computing disallowance under Section 14A:
The assessee contended that no expenditure was incurred for earning exempt dividend income, as investments were made from its own share capital and reserves, not from borrowed funds. The AO, however, held that funds were mixed and presumed that borrowed funds were partly used for tax-free investments, computing disallowance under Rule 8D. The CIT(A) upheld the AO's application of Rule 8D but directed the AO to exclude interest on loans taken after the financial year 2005-06 and interest directly related to taxable income.

3. Allocation of interest expenses for earning exempt dividend income:
The CIT(A) found merit in the assessee's argument that no fresh tax-free investments were made after the financial year 2005-06, and thus, interest on loans taken after this period should not be considered for disallowance under Section 14A. The CIT(A) directed the AO to exclude such interest while computing disallowance under Rule 8D(2). The Tribunal upheld this decision, as the Revenue failed to rebut the CIT(A)'s findings.

4. Disallowance of administrative and other expenses indirectly attributable to earning exempt income:
The assessee's appeals focused on the disallowance of other expenses under Rule 8D(2)(iii). The Tribunal noted the contradiction in the assessee's claim of no expenditure incurred for earning exempt income while offering a disallowance of Rs. 1 lakh. The AO did not separately discuss or provide a finding on this aspect. The Tribunal found no specific satisfaction recorded by the AO regarding the correctness of the assessee's claim. Consequently, the Tribunal restored the matter to the AO for fresh consideration, directing the AO to decide the issue afresh after giving the assessee an opportunity to present its case.

Conclusion:
The Tribunal dismissed the Revenue's appeals and treated the assessee's appeals as allowed for statistical purposes, directing the AO to re-examine the disallowance of other expenses under Rule 8D(2)(iii).

Order Pronounced:
The order was pronounced in the court on 30th September, 2014.