2014 (7) TMI 256 - AT - Income Tax

Disallowance u/s 14A r.w Rule 8D of the Rules Interest on exempt income Held that - CIT(A) rightly held that the interest expenditure that could be considered for disallowance was to be the net amount of interest which the assessee had to incur - the source of income and the destination of expenditure were same and when both had a direct nexus with the earning of exempt income, the expenditure in that regard would be that which was actually incurred by the assessee - the assessee had himself disallowed all the expenditure claimed to be incurred by him - CIT(A) after proper appreciation of the facts has categorically held that there was a direct nexus between loan, interest paid on loan amount, the interest received on margin money as well the investments made thus, CIT(A) rightly held that the assessee was right in his action in netting the interest received against the interest paid, while calculating the interest expenditure incurred for the purpose of investments as the source of money for investment and the destination of expenditure were the same thus, there was no infirmity in the order of the CIT(A) Decided against Revenue.

Summary

Issues:
1. Disallowance under section 14A read with Rule 8D of the Income Tax Rules.
2. Netting off of interest income against expenditure incurred for interest in earning exempt income.

Analysis:
1. The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) concerning the disallowance under section 14A read with Rule 8D of the Income Tax Rules for the assessment year 2009-10. The assessee, engaged in securities investment and textile trading, had suo-moto disallowed a certain amount, which was subsequently deleted by the CIT(A). The Revenue challenged this deletion, raising specific grounds related to the disallowance amount and the netting off of interest income against expenditure incurred for earning exempt income.

2. The primary issue revolved around the calculation of disallowance under section 14A. The assessee had disclosed exempt dividend income received from a group company, which was funded through a term loan. The assessee had pledged shares purchased from the loan as security, with provisions for margin money adjustments based on the security's value. The interest income earned on additional deposits with the lender was netted off against interest expenditure for the loan amount. The AO, however, disallowed the interest income netting and added it to the disallowance, leading to the appeal.

3. The CIT(A) analyzed the case and observed a direct nexus between the loan, interest payments, interest received on margin money, and investments made. The CIT(A) found merit in the assessee's netting off approach, considering the source of funds for investment and expenditure were the same. Relying on precedent, the CIT(A) upheld the assessee's action of adjusting interest income against expenditure, leading to the deletion of the additional disallowance made by the AO.

4. The Tribunal concurred with the CIT(A)'s decision, emphasizing the direct connection between the loan, interest payments, interest received, and investments. The Tribunal affirmed that the assessee's netting off of interest income against expenditure was justified, as the source and destination of funds were interconnected. Consequently, the Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s order.

In conclusion, the judgment addressed the disallowance under section 14A read with Rule 8D and the validity of netting off interest income against expenditure incurred for earning exempt income, ultimately ruling in favor of the assessee and dismissing the Revenue's appeal.