2017 (12) TMI 1007 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Held that - Assessing Officer has taken value of investments yielding exempt income at 76.74 lac. As against this the assessees s capital fund at the close of the year stands at 2.97 crore. This shows that the assessee s capital fund is far in excess of the amount of investments in securities yielding exempt income thereby requiring no disallowance under clause (ii) of rule 8D(2). Turning to clause (iii) of Rule 8D(2) it is seen while making disallowance under Rule 8D(2)(iii) it is only the average of those investments which have yielded exempt income are to be taken into consideration and not the average of all investments as has been done by the AO in this case. Adverting to the facts of the instant case it is seen that the disallowance has been made in ignorance of law as approved in ACB India Ltd. vs. ACIT (2015 (4) TMI 224 - DELHI HIGH COURT ) . Therefore set aside the impugned order and direct the computation of correct amount of disallowance under clause (iii) of Rule 8D(2). As regards the computation made under clause (i) of rule 8D(2) the ld. AR submitted that such calculation suffers from infirmities which have not been sorted out by the ld. first appellate authority as well. She submitted that certain expenses which do not relate to exempt income have also been considered. Without going into the details of such expenses I consider it expedient to set aside the impugned order on this score as well and remit the matter to the file of Assessing Officer for deciding this issue as per law after allowing reasonable opportunity of being heard to the assessee. It is made clear that if the disallowance under clauses (i) and (iii) of Rule 8D(2) exceeds the amount of exempt income then the disallowance should be restricted to the extent of exempt income as has been sustained in the first appeal. If however this exercise results in some further relief to the assessee the same should be granted. Enhancement of income u/s 57(iii) - assessee earned interest income on fixed deposits with the bank - deduction was claimed for a sum being the amount paid to the bank on overdraft facility and the remaining amount was offered to tax - Held that - The issue raised through this ground is no more res integra in view of the judgment of the Hon ble Supreme Court in the case of CIT vs. Dr. V.P. Gopinathan (2001 (2) TMI 10 - SUPREME Court ) in which it has been held that interest on loan taken by the assessee from bank on the security of fixed deposits cannot be reduced from his income by way of interest on the fixed deposits placed by him in the bank. Reliance of the ld. AR on certain decisions contrary to that of the Hon ble Apex Court in the case of Dr. V.P. Gopinathan (supra) cannot be sustained. Therefore uphold the impugned order on this score.

Summary

Issues:
1. Disallowance u/s 14A of the Income-tax Act, 1961.
2. Enhancement of income u/s 57(iii) of the Act.

Issue 1: Disallowance u/s 14A of the Income-tax Act, 1961:
The appeal concerns the confirmation of part disallowance u/s 14A of the Income-tax Act. The Assessing Officer computed disallowance u/s 14A at &8377; 1,75,884/-, which the CIT(A) reduced to &8377; 92,842/-. The main contention was whether the investments yielding exempt income were made from interest-free funds or interest-bearing funds. The Tribunal referred to various precedents to establish that if there are sufficient interest-free funds available to meet investments, no disallowance of interest can be made. The Tribunal found that the assessee had enough own funds to make investments without using interest-bearing funds, hence upholding the order of the CIT(A). The Tribunal relied on judgments by the High Courts and the Supreme Court to support its decision.

Issue 2: Enhancement of income u/s 57(iii) of the Act:
The second issue pertains to the enhancement of income under section 57(iii) of the Act. The CIT(A) taxed interest at the gross level u/s 57(iii) after finding that the fixed deposits were pledged as security with the bank for availing the overdraft facility. The assessee claimed deduction for the amount paid to the bank on the overdraft facility. The Tribunal upheld the impugned order citing the judgment of the Supreme Court in CIT vs. Dr. V.P. Gopinathan, which held that interest on a loan taken by the assessee from the bank on the security of fixed deposits cannot be reduced from income by way of interest on the fixed deposits. The Tribunal rejected the arguments contrary to the Supreme Court's decision and upheld the CIT(A)'s order.

In conclusion, the Tribunal partly allowed the appeal for statistical purposes, addressing both the issues raised in the case. The judgment provides a detailed analysis of the legal principles and precedents governing the disallowance u/s 14A and the treatment of income enhancement u/s 57(iii) of the Income-tax Act, 1961.