2021 (7) TMI 1074 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - AO noticed that the assessee has earned share income from firms and claimed the same as exempt u/s 10(2A) and the assessee did not make any disallowance u/s 14A - A.R. submitted that the assessee did not incur any expenditure for earning the exempt income - HELD THAT - Exempt income constitutes fraction of total revenue. With regard to the interest expenses, it is submitted that they have been incurred in respect of project specific loans and no part of the said loans have been diverted to partnership firms. It is in the common knowledge of everyone, the project specific loans can be used for the specific projects and further the usage of loans will also monitored by the bank. Accordingly, in the absence of any material to show that the project specific loan has been diverted for investment in partnership firms, the disallowance out of interest expenditure is not called for - we are of the view that there is no necessity to apply the provisions of rule 8D. Addition of other expenses - Assessee has claimed other expenses of ₹ 14.13 crores, out of which only ₹ 48.52 lakhs alone can be said to be common expenses. A.R submitted that the services and facilities used by assessee from other concerns and also by the other concerns from the assessee have been quantified and cross charged. Hence, overall supervision of the activities of partnership firms by the assessee would be relevant for sec.14A of the Act. Major income of the assessee is from property development, we are of the view that the disallowance u/s 14A of the Act can be made at an adhoc figure of ₹ 2.00 lakhs and the same, in our view, would meet the requirements of section 14A of the Act. We set aside the order passed by Ld. CIT(A) on this issue and direct the A.O. to restrict the disallowance to two lakhs rupees u/s 14A of the Act. - Decided partly in favour of assessee.

Summary

Issues:
Disallowance under section 14A of the Income-tax Act, 1961 for the assessment year 2012-13.

Analysis:
1. The appeal challenges the order confirming the disallowance of &8377; 42.42 lakhs made by the Assessing Officer (AO) under section 14A of the Income-tax Act, 1961. The appellant, engaged in property development, earned exempt share income from firms totaling &8377; 20.32 lakhs under section 10(2A) of the Act. The AO computed the disallowance under Rule 8D of the IT Rules, consisting of interest and expenditure disallowances, which was upheld by the Ld. CIT(A).

2. The appellant argued that no expenditure was incurred for earning the exempt income, mainly derived from property development activities. The appellant's major expenses were directly related to property development, with only certain common expenses. The loans taken by the appellant were project-specific, and interest expenses were directly related to the projects executed. The appellant contended that the disallowance under section 14A was unwarranted due to specific circumstances.

3. The Dispute Resolution (DR) supported the Ld. CIT(A)'s order. The Tribunal observed that the AO computed the disallowance at &8377; 42.42 lakhs, although the exempt income was only &8377; 20.32 lakhs. Notably, the major income of the appellant was from property development, while the exempt income constituted a fraction of the total revenue. Regarding interest expenses, the Tribunal found no diversion of project-specific loans to partnership firms, thus deeming the disallowance unnecessary.

4. The Tribunal noted that out of the total claimed expenses of &8377; 14.13 crores, only &8377; 48.52 lakhs could be considered common expenses. Considering the appellant's supervision of partnership firms' activities and the nature of its income, the Tribunal decided an ad hoc disallowance of &8377; 2.00 lakhs under section 14A would suffice, setting aside the Ld. CIT(A)'s order and directing the AO to restrict the disallowance accordingly.

5. Consequently, the appeal was partly allowed, and the disallowance under section 14A was limited to two lakhs rupees, as per the Tribunal's decision pronounced on 25th June 2021.