2016 (8) TMI 51 - AT - Income Tax

Disallowance u/s. 14A - whether disallowance can be made under Rule 8D? - Held that - Following the principles laid down by the Hon ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd., 2009 (1) TMI 4 - BOMBAY HIGH COURT we are of the opinion that no part of the interest paid on the borrowed funds can be disallowed under Rule 8D(2)(ii). Moreover, if at all there is any diversion of funds that should trigger disallowance u/s. 36(1)(iii) i.e., for diversion of funds from the business. AO has not disallowed any amount u/s. 36(1)(iii). In view of this, we are of the opinion that the interest paid on term loans obtained cannot be considered as interest which is not directly attributable to any particular income or receipt under Rule 8D(2)(ii). In view of this, disallowance of ₹ 11,49,176/- invoking the sub-Rule 2(ii) is set aside. Coming to the disallowance invoking Sub- Rule (2)(iii) of 0.5% of average value of investment, Rule 8D(2) (iii) specifies that an amount equal to % of the average value of investment, income from which does not or shall not form part of the total income, as appear in the balance sheet of assessee on the first day and the last day of the previous year has to be attributed. Working has to be made on the investment as specified, without segregating them on income yielding or non-income yielding during the year. The investment in Bill Roth Hospitals Ltd., has potential to earn dividend in a later year. Thus AO is correct in disallowing 0.5% of the average investments as available in the balance sheet. To that extent, assessee s contentions are rejected. - Decided partly in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Application of Rule 8D(2)(ii) for proportionate interest expenditure.
3. Application of Rule 8D(2)(iii) for administrative expenditure.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The core issue in this appeal is the disallowance of expenses under Section 14A of the Income Tax Act, which pertains to the expenditure incurred in relation to income that does not form part of the total income. The assessee, engaged in the healthcare business, earned a dividend of ?42,37,790/- from mutual funds and claimed exemption. The Assessing Officer (AO) invoked Section 14A read with Rule 8D and made a disallowance of ?11,70,865/-. The assessee contended that no direct expenditure was incurred, and there was no interest expenditure related to the investments, as it had sufficient reserves and surplus to cover the investments. The AO, however, disallowed proportionate interest expenditure and administrative expenses under Rule 8D(2)(ii) and Rule 8D(2)(iii), respectively.

2. Application of Rule 8D(2)(ii) for Proportionate Interest Expenditure:
The AO invoked Rule 8D(2)(ii) to disallow ?11,49,176/- as proportionate interest expenditure on secured loans. The assessee argued that the loans were obtained for specific purposes, such as the purchase of hospital equipment, and no part of the borrowed funds was used for investments. The AO failed to provide evidence that the borrowed funds were diverted to investments. The Tribunal examined the balance sheet and found sufficient share capital and reserves to cover the investments. Following the principles laid down by the Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd., [313 ITR 340] (Bom), the Tribunal concluded that no part of the interest paid on borrowed funds could be disallowed under Rule 8D(2)(ii). The disallowance of ?11,49,176/- was set aside.

3. Application of Rule 8D(2)(iii) for Administrative Expenditure:
The AO disallowed ?21,189/- under Rule 8D(2)(iii), which specifies 0.5% of the average value of investments. The assessee contended that the disallowance should only apply to investments that earned income, relying on the decision of the Hon'ble Delhi High Court in ACB India Ltd. The Tribunal noted that Rule 8D(2)(iii) requires disallowance based on the average value of investments, irrespective of whether they yielded income during the year. The Tribunal referred to the Co-ordinate Bench decision in Bellwether Microfinance Fund Pvt. Ltd., which clarified that disallowance under Rule 8D(2)(iii) applies to the average value of investments as appearing in the balance sheet, regardless of income generation. Consequently, the Tribunal upheld the AO's disallowance of 0.5% of the average investments.

Conclusion:
The Tribunal partly allowed the appeal, setting aside the disallowance under Rule 8D(2)(ii) for proportionate interest expenditure but upholding the disallowance under Rule 8D(2)(iii) for administrative expenditure. The order was pronounced in the open Court on 27th July 2016.