2019 (7) TMI 236 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D - interest expenses and administrative expenses - net interest earned during year - assessee claimed that these are old investments and no expenditure incurred - HELD THAT - A perusal of the order of the ld.CIT(A) would reveal that the assessee has net interest income. It has shown interest income of ₹ 58,38,817/-therefore interest is not required to be computed for making disallowance. For buttressing our view point, we rely upon judgment of Hon ble Gujarat High Court in the case of CIT Vs. Nirma Capital Credit P.Ltd., 8 2017 (9) TMI 485 - GUJARAT HIGH COURT . The ld.AR during the course of hearing also pointed out that if the calculation is being made on the basis of 0.5% of average value of the investment, which has yielded dividend, then total expenditure could be worked at ₹ 548/- only. Therefore, considering the details submitted by the assessee as well as the fact that on similar investment no expenditure was disallowed in earlier years or in the subsequent year, we are of the view that no disallowance is required u/s 14A in the present year also. This ground of appeal is allowed.

Summary

Issues:
Appeal against CIT(A)'s order upholding addition under section 14A of the Income Tax Act.

Analysis:
The appellant, an AOP engaged in the manufacturing business, contested the addition of ?3,06,737 under section 14A of the Income Tax Act by the AO. The AO disallowed expenses related to earning exempt income, citing the surplus funds invested by the appellant. The AO referred to case laws supporting disallowance of expenses related to exempt income. Additionally, the AO considered disallowance under Rule 8D based on case laws like CIT vs. Popular Vehicle Service Ltd. and Pradeep Kar vs. Asstt. Commissioner of Income Tax.

In the appeal before the CIT(A), the disallowance was reduced to ?3,06,737, representing 0.5% of the average investment for administrative expenses. The appellant presented a detailed breakdown of dividends from mutual funds to support their case. The appellant argued that no disallowance was made in previous or subsequent years on similar investments. The CIT(A) relied on the AO's order.

Upon review, the Tribunal noted that the appellant had a net interest income, hence interest computation for disallowance was not required. Regarding administrative expenses, the Tribunal observed that the AO must justify the non-acceptance of accounting entries showing interest expenditure before applying Rule 8D. The appellant demonstrated no expenditure for mutual fund investments, and historical data supported this claim.

The Tribunal accepted the appellant's argument that no disallowance was necessary under section 14A, considering the minimal expenditure calculated based on the average value of dividend-yielding investments. The Tribunal emphasized that similar investments did not face disallowance in prior or subsequent years. Consequently, the Tribunal allowed the appeal, ruling in favor of the appellant.

In conclusion, the Tribunal set aside the CIT(A)'s order and allowed the appellant's appeal, emphasizing the lack of necessity for disallowance under section 14A based on the facts and historical data presented by the appellant.