2016 (11) TMI 710 - AT - Income Tax

Disallowance u/s 14A - Held that - As decided in assessee s own case for A.Y. 2011-12 the assessee has demonstrated by placing sufficient material on record that no borrowed funds were utilized for making investment and wherefrom the exempt income is earned. In our considered view, the provisions of section 14A of the Act read with rule 8D of Income Tax Rules, cannot be invoked in mechanical way by AO. As per section 14A(2), the AO is required to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act and in accordance with rule 8D of Income Tax Rules, 1961 if the AO having regarding to the accounts, is not satisfied with the correctness of the claim of the asessee in respect of such expenditure in relation to such exempt income, is empowered for making disallowance as per rule 8D. In the case in hand, no finding is recorded by the AO in this regard. On the contrary, the ld. CIT(A) has given a finding after examining the accounts of the assessee. The AO has not brought on record any material to show that the assessee has incurred any expenditure in relation to the income which do not form part of the total income. - Decided in favour of assessee

Summary

Issues:
Disallowance of expenses under section 14A of the IT Act, 1961.

Analysis:
The appeal was filed by the Revenue against the order of ld. CIT(A)-I, Jaipur regarding the disallowance of expenses under section 14A of the IT Act, 1961. The appellant, a NBFC engaged in asset financing and channel financing business, had earned dividend income during the year under consideration. The AO disallowed expenses related to exempt income and made an addition of &8377; 52,74,497 under section 14A of the Act. However, the ld CIT(A) deleted the disallowance, leading to the Revenue's appeal.

The ld CIT(A) found merit in the appellant's contention that the expenditure incurred for earning exempt income had already been disallowed in the computation of income. The investments were made in the appellant's subsidiary company for holding and controlling stake, not for earning income. As the investments were made out of own funds for long-term business control, the ld CIT(A) concluded that no administrative expenses beyond the disallowed amount were incurred. The AO failed to show any material indicating additional expenditure related to exempt income. The ld CIT(A) referenced the principle of apportionment in section 14A, emphasizing the need for a proximate relationship between expenditure and income not forming part of the total income.

The ld AR pointed out a previous decision by ITAT, Jaipur Bench in the appellant's favor for a different assessment year, arguing for consistency. The Coordinate Bench in the referenced decision upheld the appellant's contentions, noting the lack of material showing additional expenditure related to exempt income. The AO's failure to record findings on the disallowed administrative expenses and the absence of evidence of borrowed funds used for investments further supported the appellant's case.

Given the consistent facts and circumstances with the previous decision, the Tribunal dismissed the Revenue's appeal. The decision emphasized the necessity for the AO to determine expenditure related to exempt income accurately, as per section 14A and rule 8D, and not invoke the provisions mechanically. The Tribunal upheld the ld CIT(A)'s order, emphasizing the lack of contrary material from the Revenue.

In conclusion, the Tribunal dismissed the Revenue's appeal, maintaining the ld CIT(A)'s decision to delete the disallowance of expenses under section 14A of the IT Act, 1961.