2016 (10) TMI 986 - AT - Income Tax

Disallowance u/s 14A - computation of amount - Held that - When the assessee has come up with a categoric plea that there is no increase in investment during the year under assessment and has not incurred any expenditure the question of resorting to estimation by the AO does not arise particularly when AO has neither disputed the audited books of account maintained by the assessee in respect of investment and dividend income nor AO has recorded his dis-satisfaction as to how any expenditure has not been incurred by the assessee in maintaining the investment. In the given circumstance the disallowance u/s 14A cannot exceed the amount of 28, 666/- already claimed exempt u/s 10(34). CIT (A) has also failed to appreciate the arguments addressed by the assessee that when no fresh investment has been made by the assessee during the year under assessment nor it has incurred any expenditure the question of invoking provisions contained under section 14A read with Rule 8D does not arise. Disallowance of interest - loans were utilized for non-business activities - Held that - The complete nexus has been established between the funds borrowed and fund parked in the FDRs to be utilized for business purpose at the time of opportune time. So in these circumstances the revenue authority was not justified in disallowing the interest claimed by the assessee both in AY 2008-09 and AY 2009-10. - Decided in favour of assessee

Summary

Issues Involved:

1. Disallowance under Section 14A read with Rule 8D.
2. Disallowance of interest under Section 36(1)(iii).
3. Classification of interest income and expenses.
4. Disallowance of share issue expenses.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

The primary issue is whether Section 14A read with Rule 8D is applicable when the assessee has neither borrowed any money to be invested in shares nor earned any exempt dividend income during the year under assessment. The assessee argued that no expenditure was incurred to earn the exempt dividend income and that the AO did not record dissatisfaction with the assessee's claim. The Tribunal observed that the assessee's audited accounts were not disputed by the AO, and no fresh investment was made during the assessment years. The Tribunal concluded that the disallowance under Section 14A cannot exceed the amount of ?28,666/- already claimed exempt under Section 10(34).

2. Disallowance of interest under Section 36(1)(iii):

The issue here is whether the interest claimed by the assessee for business purposes should be disallowed. The AO and CIT(A) disallowed the interest on the grounds that the loans were utilized for non-business activities. However, the Tribunal found that the loans were kept in fixed deposits, which were ready funds available for business purposes. The Tribunal noted that the AO did not provide any material evidence to prove that the borrowed funds were used for non-business purposes. Hence, the Tribunal ruled in favor of the assessee, allowing the interest claimed under Section 36(1)(iii).

3. Classification of interest income and expenses:

The AO treated the interest received and paid as "Income from other Sources" instead of "Profits and gains from Business and Profession." The Tribunal, however, did not find a detailed discussion on this issue in the judgment text provided. Hence, it appears the Tribunal focused more on the disallowance aspects rather than reclassifying the income and expenses.

4. Disallowance of share issue expenses:

The assessee claimed that the expenses paid were in the nature of fees paid to the Registrar of Companies (ROC) for increasing the share capital, which should be allowable as revenue expenditure. However, the Tribunal did not provide a detailed analysis on this issue in the judgment text provided. The ground was not pressed by the assessee during the hearing, and thus, it was determined against the revenue.

Conclusion:

The Tribunal partly allowed the appeal for the assessment year 2008-09 and fully allowed the appeal for the assessment year 2009-10. The Tribunal held that the disallowance under Section 14A read with Rule 8D should be restricted to the amount of exempt income, and the interest claimed under Section 36(1)(iii) should be allowed as it was for business purposes. The issue of share issue expenses was not pressed and thus determined against the revenue.