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2021 (8) TMI 870 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - HELD THAT - As decided in JOINT INVESTMENTS PVT LTD 2015 (3) TMI 155 - DELHI HIGH COURT by no stretch of imagination can s. 14A or r. 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in s. 14A, and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income - thus we direct the Assessing Officer to restrict the disallowance to the extent of exempt income. Net off interest income with interest expenditure - HELD THAT - It is an undisputed fact that the assessee has parked its surplus funds in fixed deposits of the bank from which it earned interest income - we find that the assessee has also paid interest to the bank. In our considered opinion, interest earned has to be netted off with interest expenditure. We, accordingly, direct the Assessing Officer to net off interest income with interest expenditure.
Issues involved:
1. Disallowance under section 14A of the Income Tax Act, 1961 for expenditure incurred on shares sold off and retained. 2. Disallowance of specific expenses for computing disallowance under section 14A. 3. Application of 10% rate of profit on interest received on Bank FDRs. 4. Disallowance of interest under Section 14A on funds borrowed for acquiring shares. 5. Netting off interest income with interest expenditure. Issue 1: Disallowance under section 14A for expenditure on shares sold off and retained: The Revenue challenged the CIT(A)'s direction to allocate expenditure on a proportionate basis towards shares sold off and retained for computing disallowance under section 14A. The Revenue contended that there is no provision under rule 8D of the Income Tax Rules for such allocation. The CIT(A) upheld the application of rule 8D but directed the AO to allocate expenses proportionately. The Tribunal referred to the High Court's decision in Joint Investments [P] Ltd, emphasizing that the disallowance should be limited to the extent of exempt income. Consequently, the Tribunal directed the AO to restrict the disallowance to the exempt income amounting to &8377;37,93,374. The Revenue's appeal and the assessee's cross objection were partly allowed on this issue. Issue 2: Disallowance of specific expenses for computing disallowance under section 14A: The assessee objected to the consideration of specific expenses, including professional charges, audit fees, interest on TDS, and interest on a loan, for computing disallowance under section 14A. The CIT(A) confirmed the application of rule 8D but directed the AO to allocate expenses proportionately. The Tribunal partly allowed the appeal and cross objection, restricting the disallowance to the exempt income amount. Issue 3: Application of 10% rate of profit on interest received on Bank FDRs: The Assessing Officer applied a 10% rate of profit on interest received on Bank Fixed Deposits (FDRs) for computing disallowance under section 14A. The Tribunal directed the AO to net off the interest income of &8377;1,12,72,374 with the interest expenditure, thereby partially allowing the appeal and cross objection. Issue 4: Disallowance of interest under Section 14A on funds borrowed for acquiring shares: The Assessing Officer disallowed interest under Section 14A on funds borrowed for acquiring shares, considering all expenses incurred by the assessee as related to investment in shares. The CIT(A) upheld the disallowance, but the Tribunal restricted the disallowance to the extent of exempt income, following the High Court's decision in Joint Investments [P] Ltd. Issue 5: Netting off interest income with interest expenditure: The Tribunal directed the AO to net off the interest income of &8377;1,12,72,374 with the interest expenditure, partially allowing the appeal and cross objection. In conclusion, the Tribunal's decision addressed various issues concerning the disallowance under section 14A and the treatment of interest income and expenditure, emphasizing the need to restrict disallowances to the extent of exempt income and to proportionately allocate expenses for shares sold off and retained. The judgment provided clarity on the application of rules and the High Court's precedents in determining the appropriate disallowances in such cases.
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