2014 (3) TMI 425 - AT - Income Tax

Disallowance of interest u/s. 14A of the Act explanation and evidences not considered - Held that - If expenditure is shown to be attributable of a particular source of income or receipt, the same cannot be taken into consideration for computing the disallowance u/s 14A of the Act. The word used in section 14A does not give any room for presumption - the disallowance u/s.14A r.w.r 8D if at all can be made only of being the expenditure directly relatable to the dividend income is allowable for disallowance - Decided partly in favour of assessee.

Summary

Issues:
- Disallowance of interest paid under section 14A
- Enhancement of disallowance by the Commissioner of Income-tax (Appeals)
- Lack of opportunity for the appellant in the enhancement process
- Disallowance of interest paid without direct relation to exempt income
- Dispute regarding the proportion of disallowance

Analysis:
1. The appeal was filed against the order of the Commissioner of Income-tax (Appeals) regarding the disallowance of interest paid under section 14A for the assessment year 2007-08. The appellant raised various grounds of appeal, including challenging the arbitrary nature of the order and the lack of opportunity in the enhancement process.

2. The appellant argued that the disallowance and enhancement by the Commissioner of Income-tax (Appeals) under section 14A were unjustified as the interest paid was not directly attributable to earning exempted income. The appellant contended that no interest-bearing funds were used for investments generating dividend income, and the interest paid was related to the business activities.

3. During the appeal, it was highlighted that the Commissioner of Income-tax (Appeals) presumed that interest-bearing funds were utilized for investments, leading to the disallowance. However, the appellant maintained that no such funds were used for investments, and the interest-free funds available exceeded the investment value, thus challenging the basis of disallowance.

4. The Tribunal analyzed the submissions and found that only a small amount of Rs.5,345 was directly related to the dividend income, which was not disputed by the appellant. The Tribunal emphasized that when an expenditure is linked to a specific source of income, it cannot be considered for disallowance under section 14A. The Tribunal also noted that the statutory provision did not allow for presumptions in such cases.

5. Consequently, the Tribunal partially allowed the appeal, reducing the disallowance to Rs.5,345, which was the amount directly related to the earning of dividend income. The Tribunal held that the disallowance made by the Commissioner of Income-tax (Appeals) was excessive and not in accordance with the provisions of section 14A. The appellant's contention regarding the lack of direct relation between interest paid and exempt income was upheld.