2014 (2) TMI 1264 - AT - Income Tax

Disallowance made by the AO u/s.14A r.w.8D - Held that - As the assessee had more funds at its disposal, in form of share capital and reserves, than the investment made during the year. Therefore, respectfully, following the orders of the Tribunal, for the earlier years, we confirm the order of the FAA for the interest expenses. As far as administrative expenses are concerned; following the order of the Tribunal for the earlier years; we direct the AO to restrict the same to 5% of dividend income. Grounds of appeal taken by the AO are allowed, in part.

Summary

Issues:
1. Disallowance of expenditure for earning exempt dividend income
2. Application of Rule 8D for calculating disallowance under section 14A

Issue 1: Disallowance of Expenditure for Earning Exempt Dividend Income
The Assessing Officer (AO) raised a ground of appeal challenging the order of the Commissioner of Income Tax (Appeals) directing the deletion of an addition made to the total income of the assessee company. The AO had calculated a disallowance under section 14A read with Rule 8D of the Income-tax Rules, 1962, amounting to Rs. 2,21,83,000. The AO reduced the amount already disallowed by the assessee in its computation of income, which was Rs. 7,89,633, and made an addition of Rs. 2,21,83,000 to the total income. The First Appellate Authority (FAA) held that the assessee had sufficient interest-free funds to cover the investments made and directed the AO to delete the addition. The Authorized Representative (AR) argued that no further disallowance was necessary as the investments were made entirely from the company's own funds. The Tribunal referred to earlier decisions in the assessee's case and upheld the FAA's order, deleting the disallowance made by the AO.

Issue 2: Application of Rule 8D for Calculating Disallowance under Section 14A
The AO computed the disallowance under section 14A read with Rule 8D at Rs. 2,29,72,633, considering the expenditure incurred for earning exempt dividend income. The AR contended that no further disallowance was warranted as the investments were made from the company's own interest-free funds. The Tribunal, referring to previous decisions in the assessee's case for AY 2006-07 and 2007-08, confirmed the FAA's order to restrict the disallowance of administrative expenses to 5% of the dividend income earned. The Tribunal found that the assessee had more funds available, including share capital and reserves, than the investments made during the year. Therefore, the Tribunal partly allowed the grounds of appeal taken by the AO, confirming the FAA's order for interest expenses and restricting administrative expenses to 5% of dividend income.

In conclusion, the appeal filed by the AO was partly allowed, with the Tribunal upholding the FAA's decision regarding the disallowance of expenditure for earning exempt dividend income and applying Rule 8D for calculating disallowance under section 14A.