2016 (11) TMI 1062 - AT - Income Tax

Disallowance u/s 14A - AY 2011-12 - Held that - The expenditure factually incurred on non-taxable receipt is to be disallowed. The expenditure assumes, presumes or deemed to be incurred on nontaxable income cannot be allowed. There should be a proximate cause for disallowance, which has relationship with the exempt income. The return of investment or huge investment cannot be a proximate cause. The assessee specifically pleaded during the assessment that they have earned non-taxable income by way of dividend on the mutual funds. The assessee has invested the excess loans funds. The assessee has suo-moto disallowed the interest expenditure of ₹ 7,03,118/-. The AO merely hold that the working of the disallowance is not as per Rule 8D, and the same was upheld by Ld. CIT(A). With the above observation, we hold that the disallowance u/s 14A should be restricted to Rs. ₹ 7,03,118/- plus ₹ 65000/- on account of administrative expenses as per Rule 8D2(iii). For AY 2012-13 assessee has surplus interest free fund of ₹ 10.10 crore and made investment of ₹ 5.56 crore during the year. On specific queries, the AR of the assessee submitted that the assessee has incurred corresponding interest expenditure of ₹ 1,95,668/-. We have further seen that the fact of this appeal are at little variance to the earlier year. In the earlier year, the assessee voluntarily made the disallowance of ₹ 7,03,118/-, however, in the year under consideration, no voluntary disallowance was made. It has come on record that assessee earned dividend income on units of mutual fund. The assessee invested the borrowed fund for the investment in the mutual fund in earlier years, thus, the assessee must incurred interest on the borrowed fund. On our specific queries, the assessee submitted the corresponding interest expenditure incurred for earning the exempt income and the such interest is worked out at ₹ 1,96,668/-. Accordingly, the AO is directed to restrict the disallowance u/s 14A of the Act at ₹ 1,95,668/- plus administrative expanses of ₹ 1,70,000/- under rule 8D2(iii).

Summary

Issues:
1. Disallowance u/s. 14A of the Income Tax Act for Assessment Years 2011-12 and 2012-13.

Detailed Analysis:
1. For AY 2011-12, the assessee claimed exempt income of ?3,40,617 without apportioning any expenditure. The AO disallowed ?10,45,373 u/s. 14A, which the assessee contested. The AR argued that only interest expenditure of ?7,03,118 was incurred to earn exempt income. The AO's disallowance was found incorrect as it did not satisfy Rule 8D. The Tribunal held that disallowance should be restricted to ?7,03,118 plus ?65,000 for administrative expenses as per Rule 8D2(iii).

2. For AY 2012-13, the assessee earned ?98,450 as dividend income without making any voluntary disallowance. The AO disallowed ?43,50,194 u/s. 14A, which was upheld in the first appeal. The Tribunal found that the assessee incurred interest expenditure of ?1,95,668 for earning exempt income. The disallowance was restricted to ?1,95,668 plus ?1,70,000 for administrative expenses under Rule 8D2(iii).

In both cases, the Tribunal emphasized the need for a proximate cause for disallowance related to exempt income and criticized the authorities for not properly examining the expenditure incurred in relation to exempt income. The Tribunal highlighted the importance of correctly apportioning expenses and ensuring the disallowance is based on actual expenditure incurred. The judgments provide detailed reasoning for restricting the disallowances and ensuring compliance with Rule 8D for accurate computation of disallowances u/s. 14A of the Income Tax Act.