2022 (11) TMI 328 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - expenses incurred purportedly for earning exempt income - assessee stated that disallowance was highly unjustified since the investment earning exempt income had not been made out of the business funds of the assessee, but out of his own personal funds - As contended that the interest expenses claimed by the assessee can be safely attributed to relating to his business and having nothing to do with his investments earning exempt income - HELD THAT - As the financial statements of the assessee produced before us that these investments are clearly not reflected in his business statements but in his personal financial statements. Even the Ld.CIT(A) gave an identical finding of fact in this regard in A,Y 2013-14, while dealing with identical issue of disallowance u/s 14A of the Act on identical investments in PPF and shares made by the assessee. In view of the above, the assessee having reasonably demonstrated that investment which had earned exempt income were made out of his personal funds which fact has been recorded even by the ld.CIT(A) in preceding year for the same investment, We see no reasons to uphold the disallowance of expenses made under section 14A of the Act in the impugned year. The disallowance made therefore as directed to be deleted. Appeal of the assessee is allowed.

Issues Involved:
1. Disallowance of expenditure under section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.

Issue-Wise Detailed Analysis:

1. Disallowance of Expenditure under Section 14A:
The appeal concerns the disallowance of Rs. 6,30,455 made by the Assessing Officer (AO) under section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules. The assessee contended that the disallowance was unjustified because the investments generating exempt income were made from personal funds, not business funds. The assessee maintained two sets of books: one for personal finances and another for the proprietary business, M/s. Sonil Builders.

The assessee argued that the interest expenses claimed were related to business activities and not to investments yielding exempt income. The exempt income included dividend income, PPF interest, and long-term capital gains on shares, totaling Rs. 2,22,333. The assessee provided detailed financial statements showing that no business funds were used for these investments. This argument was supported by the fact that in the previous assessment year (AY 2013-14), a similar disallowance was deleted by the CIT(A) based on the same reasoning.

2. Assessment by CIT(A):
The CIT(A) dismissed the assessee's contentions, stating that the assessee did not furnish documentary evidence to support the claims. However, the assessee argued that all necessary documents, including financial statements, were submitted with the return of income and were part of the assessment record. The CIT(A) in AY 2013-14 had acknowledged that investments were made from personal funds, not business funds, and deleted a similar disallowance.

3. Arguments by the Departmental Representative (DR):
The DR supported the CIT(A)'s order, emphasizing that the assessee failed to provide documentary evidence during the assessment proceedings to substantiate the claim that no business funds were used for the investments generating exempt income. The DR pointed out that the AO had specifically mentioned the utilization of borrowed funds for making investments that earned exempt income, which the assessee failed to rebut.

4. Tribunal's Findings:
The Tribunal considered the rival contentions and examined the financial statements. It found that the assessee consistently demonstrated that the investments generating exempt income were made from personal funds. The financial statements corroborated this claim, showing that these investments were reflected in personal accounts, not business accounts. The Tribunal noted that the CIT(A) in AY 2013-14 had given a similar finding, supporting the assessee's claim.

Conclusion:
The Tribunal concluded that the assessee had reasonably demonstrated that the investments generating exempt income were made from personal funds. Consequently, the disallowance of Rs. 6,30,455 under section 14A was unjustified. The Tribunal directed the deletion of the disallowance and allowed the appeal in favor of the assessee.

Order:
The appeal of the assessee is allowed. The disallowance made under section 14A of the Income Tax Act, amounting to Rs. 6,30,455, is directed to be deleted. The order was pronounced in the Court on 19th October 2022 at Ahmedabad.

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