2018 (8) TMI 1364 - AT - Income Tax

Disallowance u/s 14A r.w.R 8D - expenses towards exempted income - assessee had made suo-moto disallowance under section 14 A of the Act. Ld. AO issued show cause notice calling upon assessee to explain disallowance computed by assessee under section 14 A of the Act. - Held that - following the ratio laid down by Hon ble Bombay High Court in case of B.R Bamsi vs. CIT (1970 (2) TMI 45 - BOMBAY HIGH COURT), do not find any infirmity in order passed by Ld. CIT (A) for Assessment Year 2008-09 and 2009-10. - Decided against the revenue.

Summary

Issues:
- Disallowance of interest under section 14A read with Rule 8D
- Disallowance calculated under section 14A r.w. Rule 8D
- Maintenance of separate accounts for loans and advances
- Disallowance computation for interest cost
- Applicability of Rule 8D to the case
- Disallowance exceeding exempt income earned
- Defensive plea regarding disallowance amount
- Entitlement to raise new grounds in appeal
- Adjudication of maintaining status quo

Analysis:

1. Disallowance of interest under section 14A read with Rule 8D:
The Ld. CIT(A) erred in deleting the disallowance of a specific amount made under section 14A read with Rule 8D. The revenue contested this deletion, arguing that the disallowance was incorrectly calculated using a direct nexus method. However, the Ld. CIT(A) upheld the disallowance based on the correct computation for the relevant assessment years.

2. Maintenance of separate accounts for loans and advances:
The Ld. AO observed that the assessee did not maintain separate accounts for loans and advances, which led to a recomputation of disallowance under section 14A. This lack of separate accounts affected the accurate calculation of disallowance, prompting the Ld. CIT(A) to uphold the correct computation for the assessment years.

3. Applicability of Rule 8D to the case:
The Ld. CIT(A) considered the applicability of Rule 8D to the case, especially in relation to the disallowance calculated under section 14A. The assessee demonstrated that interest-bearing funds were not used for investments during the relevant assessment year, leading to the restoration of the disallowance computed by the assessee.

4. Disallowance exceeding exempt income earned:
The defensive plea raised by the Ld. Counsel highlighted that the disallowance amount should not exceed the exempt income earned by the assessee. This argument was supported by a decision of the Hon'ble Delhi High Court, emphasizing that the disallowance should be limited to the expenditure related to tax-exempt income.

5. Entitlement to raise new grounds in appeal:
The issue of raising new grounds in appeal was addressed, emphasizing the importance of maintaining status quo and not seeking additional relief without filing a cross objection or cross appeal. The defensive plea before the Tribunal aimed to uphold the decisions passed by the Hon'ble Bombay High Court, ensuring that no further addition was made beyond what was allowed by the Ld. CIT(A).

6. Adjudication of maintaining status quo:
In line with the principles laid down by the Hon'ble Bombay High Court, the Tribunal found no infirmity in the orders passed by the Ld. CIT(A) for the relevant assessment years. The decision to dismiss the grounds filed by the revenue was based on the lack of cross objection/appeal, preventing the setting aside of the disallowance computation upheld by the Ld. CIT(A).

This detailed analysis of the judgment showcases the key issues addressed by the Appellate Tribunal ITAT DELHI and the comprehensive legal reasoning behind the decisions made regarding the disallowance of interest, maintenance of separate accounts, applicability of Rule 8D, and the entitlement to raise new grounds in appeal.