2012 (7) TMI 342 - AT - Income Tax

Addition made on account of dividend income - claimed as exempt in terms of sec. 10(34) - CIT(A) deleted the addition - Held that - As the assessee has invested in mutual funds during the previous year under consideration and the Revenue could not produce any evidence contrary to the findings recorded by the CIT(A) no infirmity is found in the order passed by the CIT(A) deleting the addition - in favour of assessee. Restricting the disallowance u/s 14A by CIT(A) - Held that - The assessee had paid interest of Rs.17,16,952/- out of which the AO had disallowed Rs.16,92,466/-. Therefore, u/s 14A disallowance of balance interest of Rs.24,486/- (Rs.17,16,952 16,92,466) can be allowed. The AO has made separate disallowance of Rs.16,92,466/- on account of interest free advances given to the sister concerns. Therefore, for the purpose of sec. 14A interest of Rs.16,92,466/- would not be considered and only remaining expense of Rs.24,486/- would be liable to be considered under sec. 14A,thus CIT(A) was justified in restricting the disallowance u/s 14A to the extent of Rs.24,486/- decided in favour of assessee.

Summary

Issues:
1. Deletion of addition of dividend income by AO.
2. Restriction of disallowance under sec. 14A.

Analysis:

Issue 1: Deletion of addition of dividend income by AO
The AO made an addition of Rs.19,96,345/- as taxable income on account of dividend income, suspecting it to be proceeds received on redemption of mutual funds. The assessee argued that the amount was actually earned as dividend income from specific mutual funds. The CIT(A) reviewed documents provided by the assessee and found that the investments and redemptions occurred during the relevant financial year, justifying the deletion of the addition. The ITAT upheld the CIT(A)'s decision, noting the lack of contrary evidence from the Revenue to dispute the findings.

Issue 2: Restriction of disallowance under sec. 14A
The AO disallowed interest relating to interest-free loans given to sister concerns, resulting in a disallowance of Rs.16,92,466/-. The assessee contended that only a balance amount of Rs.24,486/- should be considered for disallowance under sec. 14A. The CIT(A) agreed, emphasizing that Rule 8D was not applicable for the assessment year under consideration. The ITAT concurred, stating that the disallowance under sec. 14A should be based on reasonableness and individual facts of the case. The disallowance was restricted to Rs.24,486/-, and the appeal by the Revenue was dismissed.

In conclusion, the ITAT upheld the CIT(A)'s decisions in both issues, resulting in the dismissal of the Revenue's appeal.