2021 (8) TMI 1190 - AT - Income Tax

Disallowance u/s.14A r.w.r. 8D - whether only activity of the assessee which is exempt from tax is the agriculture activity and that during the year assessee had incurred loss from agricultural activity which was duly disallowed by the assessee in the return of income - HELD THAT - Entire expenses attributable to the agricultural division had already been subject matter of voluntary disallowance by the assessee - Other expenses incurred are only expenses attributable to the regular business of the assessee and it could be safely concluded that the same cannot be construed to have incurred for the purpose of earning any exempt income - assessee had vehemently pleaded before the lower authorities that interest paid on loans are used only for the purpose of non-agri division activities of the assessee which does not require any apportionment towards the agri- division. This fact has not been controverted by cogent evidences by the lower authorities - there cannot be any disallowance of interest under second limb of Rule 8D(2) of the Rules - disallowance made under first and third limb of rules, the same gets subsumed in the disallowance of loss incurred from agricultural division which had already been made by the assessee in the return of income. Accordingly, there cannot be any disallowance of expenses separately u/s.14A of the Act in the peculiar facts of the instant case. Ground No.1 raised by the assessee is allowed.

Summary

Issues:
Disallowance made under Section 14A of the Income Tax Act, 1961.

Analysis:
The appeal in ITA No.4301/Mum/2019 for A.Y.2016-17 was against the order of the ld. Commissioner of Income Tax (Appeals) confirming the disallowance made under Section 14A of the Act. The only issue to be decided was whether the disallowance of ?5,35,981 was justified. The assessee, a private limited company deriving income from agriculture business, lease rent income, and other sources, did not appear during the proceedings. The ld. AO observed that the assessee earned income from both agriculture and non-agriculture divisions. The assessee had disallowed a loss from the agri-division in the return. The ld. AO proceeded to make disallowance under Rule 8D(2) of the Rules in all three limbs and arrived at the total disallowance amount. The ld. CIT(A) upheld the disallowance based on the previous year's order. The Tribunal noted that the expenses attributable to the agricultural division had already been voluntarily disallowed by the assessee. The Tribunal found that the other expenses incurred were for the regular business and not for earning exempt income. The Tribunal concluded that there was no need for disallowance of interest under the second limb of Rule 8D(2) as the interest paid on loans was used for non-agri division activities. The disallowance made under the first and third limb of rules was subsumed in the loss disallowed from the agricultural division. Therefore, no separate disallowance of expenses under Section 14A was warranted in this case. Consequently, the appeal of the assessee was allowed.

The judgment emphasized that the expenses attributable to the agricultural division had already been disallowed by the assessee voluntarily. The Tribunal found that the other expenses incurred were for the regular business and not for earning exempt income. It was noted that the interest paid on loans was used for non-agri division activities, and there was no need for disallowance under the second limb of Rule 8D(2). The disallowance made under the first and third limb of rules was considered subsumed in the loss disallowed from the agricultural division. Therefore, no separate disallowance of expenses under Section 14A was warranted in this case, leading to the allowance of the assessee's appeal.