2018 (2) TMI 1652 - HC - Income Tax

Disallowance u/s 14A - grievance of the Revenue is that Rule 8D of the Rules ought to be applied in the facts of the present case - Held that - We find that the issue as raised by the Revenue is concluded against it by the decision of this Court in CIT v/s. HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT wherein it has been held that where the Assessee has its own funds, no occasion to disallow any part of interest payment made by the Assessee under Section 14A can arise. Further, we also note that the Assessing Officer has not recorded his non-satisfaction with the claim for disallowance made by the Respondent before proceeding to apply Rule 8D of the Rules. Further, we find that the disallowance of expenditure to the extent of 5% of the dividend income earned, is reasonable. No substantial question of law

Summary

Issues Involved:
Challenge to order of Income Tax Appellate Tribunal under Section 260A of the Income Tax Act, 1961 regarding disallowance under Section 14A of the Act for Assessment Year 2009-10.

Analysis:
The primary issue in this case revolved around the disallowance of expenses under Section 14A of the Income Tax Act, 1961. The Respondent, a non-banking finance company, had received exempted dividend income during the relevant Assessment Year. Initially, the Respondent had voluntarily disallowed 1% of the expenses as attributable to earning exempt income. However, the Assessing Officer proceeded to compute the disallowance under Rule 8D of the Income Tax Rules, resulting in a total disallowance of ?60.24 lakhs. The Respondent then appealed to the Commissioner of Income Tax (Appeals), who dismissed the appeal.

Upon further appeal, the Tribunal observed that the investments made to earn exempted income were from the Assessee's own funds, leading to the conclusion that no disallowance on account of interest expenditure could be made. The Tribunal, however, enhanced the disallowance from 1% of expenses to 5% of the dividend income earned as expenditure to earn exempted income. The Revenue contended that Rule 8D of the Rules should be applied, but the Court held that the issue was settled by a previous decision where it was established that if the Assessee has its own funds, no disallowance of interest payment can be made under Section 14A of the Act.

The Court further noted that the Assessing Officer did not express dissatisfaction with the Respondent's claim for disallowance before applying Rule 8D. Ultimately, the Court found the 5% disallowance of expenditure to be reasonable. Consequently, the Court dismissed the appeal, stating that the question raised did not give rise to any substantial question of law. No costs were awarded in the matter.