2016 (12) TMI 111 - AT - Income Tax

Disallowance u/s 14A - Held that - We find from the balance sheet on 31.3.2010 that the assessee s own interest free funds were ₹ 3,44,28,517/- against the investment in shares and securities of ₹ 1,77,34,233/-. We are of the considered opinion that the case of the assessee is squarely covered by the ratio laid down in the case of HDFC BANK LTD (2014 (8) TMI 119 - BOMBAY HIGH COURT) in which the Hon ble High Court has held that in case interest free funds are more than the investments made in the shares and securities which yielded exempt income then the presumption would be that investments were made in the shares and securities out of interest free funds. In view of the facts and circumstances of the case, we are of the considered opinion that the case of the assessee is squarely coved by the decision of the Hon ble jurisdictional High Court and accordingly, we set aside the order of the ld. CIT(A) and direct the AO to delete the addition as made under rule 8D(2(ii) of the Rules.

Summary

Issues:
- Disallowance under section 14A of the Income Tax Act, 1961 read with rule 8D of the Income Tax Rules, 1962.

Analysis:
1. The appeal was against the disallowance of &8377; 16,29,409/- by the AO under section 14A of the Income Tax Act, 1961. The AO added this amount to the income of the assessee, who then appealed to the First Appellate Authority, where the action of the AO was confirmed.

2. The assessee contended that investments in shares and securities, yielding exempt income, were made from interest-free funds. The First Appellate Authority rejected this contention and upheld the disallowance under rule 8D(2)(ii) due to mixed funds being used for investments, necessitating disallowance of interest under Rule 8D(2)(ii). The AO's action was upheld, subject to verification of certain figures.

3. The First Appellate Authority also upheld the disallowance under Rule 8D(2)(iii) as the assessee failed to show that no part of administrative expenditure could be attributed to earning tax-free income. The assessee's argument that net interest expenditure should be considered for disallowance was dismissed, citing Rule 8D(2)(ii) mandating consideration of total gross interest expenditure.

4. The assessee argued that their interest-free funds exceeded the investments in shares and securities, referencing the audited balance sheet. The assessee relied on relevant case law to support their claim that no disallowance under rule 8D(2)(ii) was warranted. The Department disagreed, asserting that the lower authorities' decisions should stand.

5. The Tribunal found that the assessee's interest-free funds exceeded the investments in shares and securities, aligning with the precedent set by the Jurisdictional High Court. Consequently, the Tribunal directed the AO to delete the addition made under rule 8D(2)(ii) of &8377; 15,37,367/-, partially allowing the assessee's appeal.

6. The Tribunal's decision was pronounced on 30th Nov, 2016, setting aside the First Appellate Authority's order and directing the deletion of the specified addition under rule 8D(2)(ii) based on the assessee's interest-free funds exceeding the investments in shares and securities.