2017 (2) TMI 863 - HC - Income Tax

Disallowance u/s 14A - Held that - We find that this case has yielded concurrent finding of facts regarding expenditure incurred by the assessee for the purpose of earning the exempt income by the Appellate Authority and the Tribunal. As such there is no scope for interference with such concurrent findings of facts. We therefore are not satisfied that the case involves any substantial question of law.

Summary

Issues:
1. Interpretation of section 14A of the Income Tax Act, 1961.
2. Determination of expenditure in relation to exempt income.
3. Nexus between borrowed funds and investment in shares.
4. Disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii).
5. Scope for interference with concurrent findings of facts.

Interpretation of section 14A of the Income Tax Act, 1961:
The case involved a dispute regarding the interpretation of section 14A of the Income Tax Act, 1961, specifically related to the disallowance of direct and indirect expenditures incurred in relation to income that does not form part of the total income. The Assessing Officer invoked section 14A and Rule 8D(2)(ii) to determine the expenditure concerning the exempt dividend income earned by the assessee.

Determination of expenditure in relation to exempt income:
The Assessing Officer found that the assessee's offer of 1% of the exempt income as expenditure lacked a basis and calculated the expenditure at a higher amount using Rule 8D(2)(ii). The dispute arose regarding whether the assessee had actually incurred any expenditure on the investments generating the dividend income. Both the CIT and Tribunal found that there was no direct nexus between the borrowed funds and the investment in shares, leading to the deletion of disallowance under section 14A read with Rule 8D(2)(ii).

Nexus between borrowed funds and investment in shares:
The Tribunal's decision highlighted that the revenue failed to establish that the investments in shares generating exempt income were made out of borrowed funds on which interest was paid by the assessee. The Tribunal confirmed that the investments were made out of the assessee's own funds, leading to the rejection of disallowance attributed to interest paid on borrowed funds for investing in interest-free funds.

Disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii):
While the disallowance under Rule 8D(2)(ii) was deleted due to the lack of nexus between borrowed funds and investments, the disallowance of indirect expenses was upheld under Rule 8D(2)(iii). The Tribunal directed relief for the sum already disallowed by the appellant.

Scope for interference with concurrent findings of facts:
The Tribunal emphasized that there were concurrent findings of facts regarding the expenditure incurred by the assessee for earning exempt income by both the Appellate Authority and the Tribunal. As a result, the Tribunal concluded that there was no substantial question of law warranting interference with the concurrent findings of facts, leading to the dismissal of the application and appeal.