2014 (3) TMI 856 - HC - Income Tax

Disallowance of interest expenses u/s 14A of the Act r.w. Rule 8D of the Rules Held that - The decision in CIT vs. Winsome Textile Industries Ltd. 2009 (8) TMI 220 - PUNJAB AND HARYANA HIGH COURT followed - the assessee did not make any claim for exemption thus, section 14A could have no application - subsection( 1) of section 14A provides that for the purpose of computing total income under chapter IV of the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act - the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax - It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made no question of law arises for consideration Decided against Revenue.

Summary

Issues:
1. Disallowance of expenditure under section 14A of the Income Tax Act.
2. Disallowance of interest expenses under section 36(1)(iii).

Detailed Analysis:
Issue 1: The Revenue challenged the judgment of the Income Tax Appellate Tribunal regarding the disallowance of expenditure of Rs.12.33 lacs under section 14A of the Income Tax Act. The Assessing Officer and CIT(Appeals) had applied the formula of Rule 8D of the Income Tax Rules. However, the tribunal reversed the disallowance, stating that the assessee did not claim any exemption for income from payment of tax. The tribunal relied on the decision of the Punjab and Haryana High Court, which held that in cases where no claim for exemption is made, section 14A of the Act could not be applied. The tribunal emphasized the importance of clear details of fund utilization and upheld the assessee's argument that no disallowance could be made under section 14A if no exempt income was claimed. Ultimately, the High Court dismissed the Tax Appeal, finding no question of law arising.

Issue 2: The Revenue also raised a question regarding the disallowance of interest expenses under section 36(1)(iii). The tribunal found that the borrowed funds were used for both business purposes and investments, and since no separate accounts were maintained, the disallowance of interest was not justified. The tribunal emphasized the necessity of applying Rule 8D, which was mandatory for that year. The tribunal considered various judicial pronouncements and ultimately allowed the ground raised by the assessee, directing the Assessing Officer to delete the addition of interest expenses. The High Court upheld the tribunal's decision, dismissing the appeal and finding no merit in the Revenue's submission.

In conclusion, the High Court upheld the tribunal's decision in both issues, emphasizing the importance of clear fund utilization details and the applicability of relevant rules and judicial pronouncements in determining disallowances under the Income Tax Act.