2014 (11) TMI 640 - AT - Income Tax

Disallowance of interest made u/s 14A r.w. Rule 8(2)(iii) - investments in the form of shares in various companies and in a partnership firm Held that - The assessee had no exempt income during both the years involved in CIT Versus M/s. Delite Enterprises 2009 (2) TMI 498 - BOMBAY HIGH COURT it has been held that the AO was not correct in applying section 14A of the IT Act in disallowing the expenditure on account of interest - It was incumbent on the AO to establish a nexus between the expenditure incurred and the income which was exempt under the Act - unless and until, there is receipt of exempted income for the concerned assessment years, Section 14A of the Act cannot be invoked - the revenue has not dispelled the contention of the assessee before AO that it was not in receipt of any exempt income - the AO has erred in invoking Section 14A of the Act Decided in favour of assessee.

Issues Involved:
1. Addition made under Section 14A of the IT Act, 1961.
2. Disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii) of the IT Rules, 1962.
3. Application of Section 14A in the absence of exempt income.
4. Violation of Rule 46A of the IT Rules.

Issue-wise Detailed Analysis:

1. Addition Made Under Section 14A of the IT Act, 1961:
The primary issue in these appeals is the addition made under Section 14A of the IT Act, 1961, which was contested by both the assessee and the revenue. The assessee argued that no disallowance under Section 14A should be made as it had no exempt income. The revenue, on the other hand, contended that the CIT(A) incorrectly deleted the disallowance made by the AO under Rule 8D(2)(ii) while sustaining the disallowance under Rule 8D(2)(iii).

2. Disallowance Under Rule 8D(2)(ii) and Rule 8D(2)(iii) of the IT Rules, 1962:
The AO made disallowances applying the formula in Rule 8D(2)(ii) for interest expenditure and Rule 8D(2)(iii) for indirect expenditure. The CIT(A) deleted the disallowance under Rule 8D(2)(ii) but sustained the disallowance under Rule 8D(2)(iii). The CIT(A) reasoned that the assessee had sufficient interest-free funds to cover the investments and relied on the decision of the Bombay High Court in CIT Vs Reliance Utilities & Power Ltd. However, the CIT(A) upheld the disallowance under Rule 8D(2)(iii) as the rule provided a formula for estimating indirect expenditure, which the AO had to apply.

3. Application of Section 14A in the Absence of Exempt Income:
The Tribunal noted that the assessee had no exempt income during the relevant years. The assessee argued that no disallowance under Section 14A should be made in the absence of exempt income, citing various High Court decisions. The Tribunal referred to decisions from the Allahabad High Court, Gujarat High Court, and Punjab & Haryana High Court, which held that Section 14A could not be invoked if there was no exempt income. The Tribunal concluded that the AO erred in invoking Section 14A, as the assessee did not have any exempt income during the assessment years in question.

4. Violation of Rule 46A of the IT Rules:
The revenue raised an additional ground, citing a violation of Rule 46A of the IT Rules, arguing that the CIT(A) considered additional particulars filed by the assessee without putting them to the AO. The DR contended that the assessee could not show the source of its own funds, and the CIT(A) accepted the assessee's claim without verification. The Tribunal, however, did not find merit in this contention, as the figures submitted by the assessee were derived from its balance sheet and schedules, and no new evidence was introduced.

Conclusion:
The Tribunal dismissed the appeals filed by the revenue and allowed the appeals filed by the assessee. The Tribunal held that Section 14A could not be invoked in the absence of exempt income and found that the AO erred in making disallowances under Section 14A. The decision of the CIT(A) to delete the disallowance under Rule 8D(2)(ii) was upheld, while the disallowance under Rule 8D(2)(iii) was also sustained.

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