2016 (9) TMI 1624 - AT - Income Tax

Disallowance u/s 14A read with rule 8D - HELD THAT - We find that the assessee has made total investment of which was invested in the shares of group company M/s Kilitch Drugs (India) Ltd in the earlier years. We also find merit in the argument of the ld. AR that the interest disallowance as confirmed by the ld. CIT(A) was wrong as no borrowed funds were used for the investments in shares as amount raised were for specific purposes and loans were used accordingly. We also find from assessee s own funds whereas the investments in the shares were only ₹ 10,88,643/-. From the said facts it is clear that these investments in the shares was made out of own funds and not from the borrowed funds. We also find merit in the submissions of the ld AR that the investments in group company were made for strategic purposes and to which provisions of s. 14A r.w.8D cannot be applied. In view of facts discussed above we are of the considered view that order of CIT(A) is wrong to that extent and accordingly we set aside the order of ld. CIT(A) and direct the AO to delete the addition to the extent thus sustaining disallowance to the extant of ₹ 77,311/-. Accordingly, the appeal of the assessee is partly allowed.

Summary

Issues:
Challenge to disallowance of expenses under section 14A read with rule 8D.

Analysis:
The appeal was filed by the assessee against the order of the ld. CIT(A) for the assessment year 2011-12, specifically challenging the disallowance of ?40,43,307/- under section 14A read with rule 8D. The AO invoked section 14A r.w.r.8D due to the assessee's tax-free income of ?60,13,150/-, despite the assessee's claim that the disallowance was not applicable. The AO disallowed ?40,43,307/-, comprising expenditure under rule 8D(2) and 8D(2)(iii), leading to a revised total income assessment. The ld. CIT(A) dismissed the appeal, citing precedents emphasizing the deeming provision of section 14A for presumptive disallowance, even if no expenditure is claimed for exempt income. The circular by CBDT clarified that expenses would be disallowed under section 14A regardless of corresponding exempt income. The appellate order referenced various judicial pronouncements supporting the disallowance under section 14A.

The assessee contended that the disallowance under section 14A r.w. 8D was incorrect, as no investments were made from interest-bearing funds. The investments were detailed in the balance sheet, showing strategic investments for gaining control over a subsidiary, not for earning dividend income. The ld. AR argued that loans were used for specific purposes, not for purchasing shares, and presented a revised working of disallowance, seeking deletion of a portion of the disallowed amount.

Upon review, it was observed that the investments were primarily made from own funds, with a minimal amount from borrowed funds, and the investments in the group company were strategic in nature. The Tribunal found merit in the arguments presented by the ld. AR and concluded that the disallowance confirmed by the ld. CIT(A) was erroneous. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to delete a portion of the disallowed amount, partially allowing the appeal.

In conclusion, the Tribunal partially allowed the appeal, directing the deletion of a portion of the disallowed amount under section 14A read with rule 8D, based on the assessment of the source of funds for investments and the strategic nature of the investments made by the assessee.