2016 (4) TMI 309 - AT - Income Tax

Disallowance u/s 14 A - Held that - We find that the assessee had earned dividend income of ₹ 1. 08 lacs, that it had made a disallowance of ₹ 17, 503/- on its own as per the provisions of Sec. 14A of the Act, that the AO had made a dsisallowance of ₹ 2. 02 lakhs, that the AO had not mentioned as to how much expenditure was incurred by the assessee for earning exempt income, that submission made by the assessee was not considered properly by the AO. We are of the opinion that disallowance u/s. 14A can be made, if an assessee claims an expenditure for earning exempt income. In other words, if no expenditure is claimed by the assessee in its P&L account for earning tax free income no disallowance can be made. Secondly, the disallowance cannot exceed the exempt income. In the case under consideration the assessee had incrred an expenditure of ₹ 17, 503/-(DMAT charges) and that was the only item which could have been disallowed. The AO himself had mentioned that assessee in its computation of income had made the said disallowance. In these circumstances, we are of the opinion that order of the FAA was not justified. Reversing his order, we decide first Ground in favour of the assessee . Addition on notional interest - Held that - We find that the AO had added a sum of ₹ 34, 038/- to the income of the assessee on notional basis. In our opinion, if the income has not accrued/received by the assessee it cannot be added to its income, unless provided in the provisions of the Act. We agree with the assessee that the Act does not provide for taxing the notional interest income. Secondly the AO is not supposed to step into the shoes of the assessee to decide as to how much interest it should charged. Therefore, reversing the order of the FAA we decide Ground in favour of the assessee .

Summary

Issues:
1. Disallowance made under section 14A of the Act.
2. Notional interest charged by the Assessing Officer.

Analysis:

1. Disallowance under Section 14A:
The assessee, a company engaged in the business of investment in shares, filed its return of income declaring total income. The Assessing Officer (AO) completed the assessment under section 143(3) of the Act, determining the income of the assessee. The first ground of appeal raised by the assessee was regarding the disallowance made under section 14A of the Act. The AO found that the assessee had not made any disallowance under section 14A and invoked Rule 8D to disallow a specific amount. The First Appellate Authority (FAA) upheld the AO's decision, stating that the AO was duty-bound to determine the expenditure incurred in relation to income not forming part of the total income under the Act. However, the Appellate Tribunal found that the disallowance made by the AO exceeded the exempt income and was not justified. The Tribunal reversed the order of the FAA and decided the first ground in favor of the assessee.

2. Notional Interest Charged:
The second ground of appeal was related to the notional interest charged by the AO. The AO added a specific amount to the total income of the assessee based on the difference between lending rates charged to different parties. The assessee argued that there was no provision in the Act to add notional interest and that the AO could not assume the role of a businessman. The FAA upheld the AO's decision, stating that the AO was justified in making the addition. However, the Appellate Tribunal disagreed with the FAA, stating that if income has not accrued or been received by the assessee, it cannot be added to its income unless provided for in the Act. The Tribunal reversed the order of the FAA and decided the second ground in favor of the assessee.

In conclusion, the appeal filed by the assessee was allowed, and the orders of both the AO and the FAA were reversed by the Appellate Tribunal.