2016 (1) TMI 1080 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8-D - Held that - There is no dispute to the fact that own funds were invested by the assessee in earning the dividend income of ₹ 57,975/- and suo-moto disallowance of ₹ 8,895/-, towards expenses to earn the exempt income. So far as applicability of Rule-8D is concerned, since, assessment year involved is 2011-12, therefore, Rule-8D will be applicable. However, since, no borrowed funds were utilized for making the investment and the assessee suo-moto made the disallowance, we find merit in the appeal of the assessee, therefore, the amount disallowable as per Rule-8D can be ₹ 1,27,601/- against the calculation of ₹ 2,31,140/- , thus, the addition is restricted to ₹ 1,03,539/- (Rs.2,31,140-1,27,301) - Decided partly in favour of assessee

Summary

Issues:
1. Disallowance of expenses under section 14A of the Income Tax Act, 1961.
2. Nexus between expenditure and income generated for disallowance under section 14A.

Issue 1: Disallowance of expenses under section 14A:

The appellant contested the disallowance of Rs. 2,31,140 under section 14A of the Income Tax Act, claiming that no borrowed funds were used for investments and the total dividend income earned was only Rs. 57,975. The appellant argued that since the investments were made from own funds, no disallowance should have been made. The appellant also highlighted that it had already disallowed Rs. 8,895 under section 14A in its computation of income. The appellant provided evidence that no borrowed funds were used and that the investments were made from own funds. The tribunal referred to relevant case laws, including decisions from the Punjab & Haryana High Court, supporting the appellant's position that investments were made from own funds. The tribunal concluded that since no borrowed funds were utilized and the appellant had already made a suo-moto disallowance, the disallowable amount under Rule 8D was restricted to Rs. 1,03,539. Consequently, the appeal was partly allowed.

Issue 2: Nexus between expenditure and income for disallowance under section 14A:

In a separate case, the appellant, engaged in manufacturing cycles and parts, earned dividend income exempted under Section 10. The Assessing Officer made a disallowance under section 14A, which was partly upheld by the CIT (A). However, the tribunal found that there was no nexus between the expenditure incurred and the income generated. The tribunal noted that the interest income exceeded the interest expenditure, and the investments were made from dividend proceeds without utilizing interest-bearing funds. The tribunal emphasized that there was no evidence to show that interest expenditure was incurred in relation to earning the tax-exempt income. Consequently, the tribunal held that the disallowance was not justified, as there was no evidence of incurring expenditure for earning the exempted income. The tribunal dismissed the appeal, emphasizing that disallowance under section 14A requires a finding of incurring of expenditure, and in the absence of such evidence, disallowance cannot stand.

In conclusion, the tribunal analyzed the facts of both cases in light of relevant legal precedents and concluded that disallowance under section 14A was not justified when investments were made from own funds without utilizing borrowed funds. The tribunal emphasized the importance of establishing a nexus between expenditure and income for disallowance under section 14A, highlighting that in the absence of evidence of incurring expenditure for earning exempted income, disallowance cannot be sustained.