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2012 (6) TMI 568 - AT - Income TaxDisallowance of interest u/s 14A in respect of exempt income from dividends - assessee contested that disallowance made by invoking sec. 14A according to which, AO cannot enhance the assessment or reduce the refund for any asst. year beginning on or before 1.04.2001 - Held that - Considering the Proviso to sec. 14A inserted by the Finance Act, 2002 with retrospective effect from 11.05.2001 and CBDT Circular No.14 of 2001 dated 12th December, 2001 no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of total income under the Income-tax Act and were assessments proceedings have become final before 1.04.2001, the assessment should not be reopened under sec. 147/154 of the Act to disallow expenditure relatable to exempt income by applying the provision of sec. 14A. In the case of the assessee, processing under sec. 143(1) was made and thereafter AO issued notice u/s 143(2) in order to verify the claims made in the return of income. Therefore, the assessee s case has not been reopened under sec. 147 nor the settled issues have been intended to be upset u/s 154 - the AO was justified in disallowing the claim of interest u/s 14A - against assessee.
Issues Involved:
1. Disallowance of interest in computation of 'Income from Business'. 2. Set-off of brought forward losses against business income. 3. Disallowance of interest under Section 14A in respect of exempt income from dividends. Detailed Analysis: 1. Disallowance of Interest in Computation of 'Income from Business': The primary issue raised by the assessee was the disallowance of interest amounting to Rs. 24,441,238 in the computation of 'Income from Business'. The assessee argued that the Commissioner of Income-tax (Appeals) [CIT(A)] erred in upholding this disallowance. The Assessing Officer (AO) had disallowed the interest expenditure under Section 14A, assessing the business income at Rs. 95,20,246. The CIT(A) upheld this disallowance, relying on various judicial decisions, stating that no deduction was allowable for interest expenditure related to income that does not form part of the total income. 2. Set-off of Brought Forward Losses Against Business Income: The assessee filed an additional ground during the hearing, contending that the CIT(A) erred in not directing the AO to allow the set-off of brought forward losses aggregating to Rs. 13,63,63,918 against the business income assessed. The assessee had filed a return of income at a business loss of Rs. 1,49,20,992 and had unabsorbed brought forward losses per Section 72 of the Income-tax Act, 1961. However, the set-off was not claimed in the return due to the loss filed. The AO did not allow the set-off in the assessment order, and the CIT(A) did not adjudicate this ground. The Tribunal found that this additional ground was admitted by the Bench and directed the CIT(A) to decide this ground in accordance with the law. 3. Disallowance of Interest under Section 14A in Respect of Exempt Income from Dividends: The assessee received dividends from Max India Ltd. amounting to Rs. 10,18,57,783 and had debited Rs. 3,28,14,797 as interest paid. The AO disallowed Rs. 2,44,41,238 of this interest under Section 14A, relating to exempt income. The CIT(A) upheld this disallowance, stating no deduction was allowable for interest expenditure related to exempt income. The assessee argued that the Delhi High Court had decided against them, but they contested the disallowance under the Proviso to Section 14A, which prevents enhancement of assessment or reduction of refund for any assessment year beginning on or before 1.04.2001. The Tribunal noted that the Proviso to Section 14A, inserted by the Finance Act, 2002, with retrospective effect from 11.05.2001, prohibits reopening cases where proceedings have become final before 1.04.2001. However, since the AO issued a notice under Section 143(2) for verification and not under Sections 147 or 154, the Proviso was not applicable. The Tribunal cited various decisions supporting this view, including the Delhi High Court's ruling in Honda Siel Power Products Ltd., which held that the Proviso does not apply during original assessment proceedings. Consequently, the Tribunal upheld the AO's disallowance of interest under Section 14A. Conclusion: The appeal was partly allowed for statistical purposes, with the Tribunal directing the CIT(A) to adjudicate the additional ground regarding the set-off of brought forward losses and upholding the disallowance of interest under Section 14A.
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