2021 (10) TMI 438 - AT - Income Tax

Disallowance of expenses relatable to exempt income by invoking the provisions of section 14A read with Rule 8D - Sufficiency of own funds - HELD THAT - Assessee stated that issue is squarely covered by the decision of Hon ble Bombay High Court in the case of CIT vs. HDFC Bank 2014 (8) TMI 119 - BOMBAY HIGH COURT - DR could not controvert the above facts - once the assessee has own funds more than the investment, no disallowance under Rule 8D(2)(ii) of the Rules can be made unless and until the Assessing Officer has able to prove the direct nexus. Hence, we delete the disallowance and reverse the orders of the lower authorities on this issue. Second disallowance of administrative expenses under Rule 8D(2)(iii) assessee stated that the total expenditure claimed in the profit and loss account is only 87,596/- and disallowance at the most can be restricted to this amount only. When this was pointed out to the learned Sr. DR, he could not controvert the same. Hence, we direct the Assessing Officer to restrict the disallowance under Rule 8D(2)(iii) of the Rules at ₹ 87,596/-. This issue of assessee s appeal is partly allowed.

Summary

Issues:
Disallowance of expenses relatable to exempt income under section 14A read with Rule 8D of the Income tax Rules, 1962.

Analysis:
The appeal before the Appellate Tribunal ITAT Mumbai arose from the order of the Commissioner of Income Tax (Appeals) confirming the disallowance of expenses relatable to exempt income by invoking section 14A read with Rule 8D of the Income Tax Rules, 1962. The Assessing Officer had made disallowances amounting to &8377; 26,35,031/-, which the assessee contested. The Tribunal noted that the assessee earned exempt income in the form of dividends on mutual funds under section 10(34) of the Income Tax Act, 1961. The disallowances made included interest expenses and administrative expenses. The Tribunal observed that the assessee had sufficient own funds exceeding the investments, citing the decision of the Bombay High Court in a similar case. Consequently, the Tribunal deleted the disallowance of interest expenses.

Regarding the disallowance of administrative expenses, the Tribunal noted discrepancies in the amount claimed in the profit and loss account compared to the disallowance made. The Tribunal directed the Assessing Officer to restrict the disallowance under Rule 8D(2)(iii) of the Rules to &8377; 87,596/-, the amount claimed in the profit and loss account. Ultimately, the Tribunal partly allowed the appeal of the assessee, reversing the orders of the lower authorities on the disallowances. The judgment was pronounced on 31.08.2021 by Sri Mahavir Singh, VP, and Sri Manoj Kumar Aggarwal, AM.