2017 (8) TMI 376 - HC - Income Tax

Addition u/s 14A - Rule 8D(2)(ii) applicability - revision us 263 - Held that - As observed by the Tribunal that there was no interest expenditure which was available for apportionment in terms of Clause (ii) of sub-rule (2) of Rule 8D of the Rules, as the entire interest expenditure was directly related to earning of taxable income. The interest and loans borrowed were paid out of sale proceeds of land and the balance of the proceeds were invested in mutual funds which yielded income. This explanation is accepted by the Assessing Officer. The Commissioner on the other hand, has not pointed out as to how the said explanation of the assessee was wrong. - Decided in favour of assessee.

Issues:
1. Interpretation of Rule 8D(2)(ii) for assessing interest bearing loans as purely for business purpose.
2. Application of Rule 8D in assessment under Section 263 of the Income Tax Act.
3. Verification of correctness of working as per Rule 8D provisions.
4. Acceptance of explanation regarding interest expenditure and investment in mutual funds.
5. Determination of substantial question of law.

Analysis:

1. The appeal in question relates to the Assessment Year 2008-2009. The appellant's counsel argued that the Tribunal failed to recognize the cash balance available as investments in mutual funds, asserting that interest bearing loans should not be solely for business purposes under Rule 8D(2)(ii). The Tribunal's decision to set aside the Section 263 order and reinstate the assessment was challenged, contending that the Assessing Officer did not properly verify the correctness of the working under Rule 8D. The appellant had applied Rule 8D, emphasizing its strict application in this case.

2. On the other hand, the respondent's counsel supported the Tribunal's decision. The Tribunal, in restoring the Assessing Officer's order, noted that no interest expenditure was available for apportionment under Rule 8D(2)(ii) as the entire interest was directly linked to taxable income. It was explained that the interest and loans were funded by land sale proceeds, with the balance invested in mutual funds generating income. The Assessing Officer accepted this explanation, and the Commissioner failed to demonstrate its inaccuracy.

3. The Tribunal's conclusion was deemed plausible upon evaluating the facts. It was highlighted that the Tribunal accepted the explanation provided by the assessee regarding the interest expenditure and investment activities, finding no fault with the Assessing Officer's decision. The Tribunal's decision was based on a thorough appreciation of the circumstances and the application of Rule 8D in the given context.

4. Ultimately, the High Court found no substantial question of law warranting further consideration. Consequently, the appeal was dismissed, and no costs were awarded. The judgment underscored the Tribunal's sound reasoning and the absence of legal issues meriting a different outcome. The Court's decision was based on the comprehensive evaluation of the facts and legal provisions involved in the case.

This detailed analysis encapsulates the key arguments, decisions, and reasoning presented in the judgment, providing a comprehensive understanding of the legal issues addressed by the High Court in this matter.

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