2017 (5) TMI 1812 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - expenditure incurred on earning exempt income - HELD THAT - AO while computing the disallowance has taken into consideration both investments related to exempt income as well as taxable income. Under these facts in our considered view AO was not justified in making the disallowance by invoking provision section 14A. The mandate of the section 14A(2) is that the AO shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income but in the given case the AO has not restricted itself to the exempt income also considered the taxable income while computing the disallowance. The AO failed to give a clear finding in respect of the submissions of the assessee that the investment was made out of interest free fund. CIT(A) demonstrated from the accounts of the assessee that the assessee was having sufficient on interest free fund for making such investment. Therefore we do not see any reason to interfere into the order of the Ld. CIT(A) same is hereby affirm. The ground of the Revenue s appeal is dismissed.

Summary

Issues Involved:

1. Deletion of disallowance made under Section 14A of the Income Tax Act.
2. Nexus between interest-bearing funds and investments.
3. Applicability of Rule 8D for computing disallowable expenditure.
4. Satisfaction of the Assessing Officer regarding the correctness of the assessee's claim.

Detailed Analysis:

1. Deletion of Disallowance under Section 14A:

The primary issue in the Revenue’s appeal was whether the CIT(A) was justified in deleting the disallowance of Rs. 59,69,827/- made under Section 14A of the Income Tax Act. The Assessing Officer (AO) had observed that the assessee earned dividend income, which did not form part of the total income, and thus, disallowed the expenditure related to earning this income by invoking Section 14A read with Rule 8D. The CIT(A) deleted this disallowance, leading to the Revenue’s appeal.

2. Nexus between Interest-Bearing Funds and Investments:

The AO failed to establish a nexus between interest-bearing funds and the investments made. The CIT(A) noted that the assessee had sufficient own funds (Rs. 3,20,36,78,800/-) compared to the investments (Rs. 91,58,22,106/-). The CIT(A) concluded that the investments were made from interest-free funds, and thus, no disallowance under Section 14A was warranted. The Tribunal upheld this finding, noting that the AO did not provide contrary evidence.

3. Applicability of Rule 8D:

The AO computed the disallowance under Rule 8D without segregating investments related to exempt and taxable income. The CIT(A) found that only a portion of the investments (Rs. 22,08,22,106/-) generated exempt income, while the rest were taxable. The Tribunal agreed that the AO’s application of Rule 8D was incorrect as it included taxable income in the disallowance computation, violating the mandate of Section 14A(2).

4. Satisfaction of the Assessing Officer:

In the Cross Objection by the Assessee, it was argued that the AO mechanically applied Section 14A read with Rule 8D without recording satisfaction regarding the incorrectness of the assessee’s claim. The Tribunal noted that the AO did not comply with Section 14A(2) requirements, which necessitate recording satisfaction about the incorrectness of the assessee’s claim based on the accounts. The Tribunal referred to similar decisions, including the ITAT Jaipur Bench in the assessee’s group case, which supported the necessity of such satisfaction.

Conclusion:

The Tribunal dismissed both the Revenue’s appeal and the Assessee’s Cross Objection. It affirmed the CIT(A)’s order, which deleted the disallowance under Section 14A, holding that the AO failed to establish a nexus between interest-bearing funds and investments, incorrectly applied Rule 8D, and did not record the necessary satisfaction regarding the assessee’s claim. The Tribunal’s decision emphasized the importance of adhering to statutory requirements and proper application of rules in disallowance computations.