2015 (6) TMI 348 - AT - Income Tax

Disallowance under section 14A r.w.s.8D - capitalization of interest expenditure as directed by CIT(A) - Held that - The ld. AR submitted that the assessee has not incurred any expenditure on earning tax free income and there is no question of disallowing notional expenditure but in our opinion there should be certain expenditure on administration of these investments from which the assessee earned exempt income. Hence, in the interest of justice we direct the AO to disallow the amount of ₹ 50,000/- on this count - Decided partly in favour of revenue.

Summary

Issues:

1. Capitalization of interest expenditure related to the acquisition of shares.
2. Disallowance of expenditure under section 14A r.w. Rule 8D for earning exempt income.

Issue 1: Capitalization of Interest Expenditure:

The appeal concerned the capitalization of interest expenditure of Rs. 42,25,030 related to the purchase of shares for the assessment year 2007-08. The Assessing Officer (AO) contended that the interest expenses incurred were not allowable as part of the cost of acquisition of capital assets. However, the Commissioner of Income Tax (Appeals) allowed the capitalization of interest expenditure, stating that the interest had a direct nexus with the acquisition of shares. The AO's argument that the interest should be disallowed under section 14A r.w.s. 8D was rejected. The Tribunal noted that the interest incurred on borrowed funds for the purchase of shares should be considered as part of the cost of investment until the date of acquisition. The Tribunal emphasized that post-acquisition interest should not be included in the cost of acquisition as it does not have a nexus with the asset's acquisition.

Issue 2: Disallowance of Expenditure under Section 14A r.w. Rule 8D:

The second issue revolved around the disallowance of expenditure under section 14A r.w. Rule 8D for earning exempt income. The AO disallowed Rs. 16,77,597 as expenditure under Rule 8D due to the application of funds and infrastructure expenses for earning exempt income. The Tribunal acknowledged that there should be certain expenditure on the administration of investments generating exempt income. While the AO's disallowance was reduced to Rs. 50,000, the Tribunal partially allowed this ground.

In conclusion, the Tribunal partially allowed the appeal by the revenue concerning the capitalization of interest expenditure and the disallowance of expenditure under section 14A r.w. Rule 8D for earning exempt income for the assessment year 2007-08. The judgment highlighted the importance of considering the nexus between expenses and asset acquisition while determining the allowable deductions and disallowances under the Income Tax Act.