2016 (8) TMI 603 - AT - Income Tax

Disallowance u/s 14A - amount of expenditure directly relating to income which does not form part of total income - Held that - We observe that assessee has voluntarily made disallowance of ₹ 65,753/- u/s 14A of the Act and to examine this fact we refer to the computation of income available at pages 21 to 24 of the paper book and find that assessee has made specific disallowance u/s 14A at ₹ 65,753/-. We further observe that before lower authorities assessee has submitted that disallowance u/s 14A of the Act has been made at ₹ 2,10,753/- which includes ₹ 65,753/- specifically made u/s 14A of the Act and remaining amount of ₹ 1,45,000/- was termed as an ad hoc disallowance. However, we are of the view that only ₹ 65,753/- can be treated as specific disallowance u/s 14A of the Act and we accept the same as the amount of expenditure directly relating to income which does not form part of the total income and there is no dispute to the same by both the lower authorities. Disallowance is called for towards interest expenditure - Held that - As per audited profit and loss account for the year under appeal, the gross interest income earned by the assessee is shown at ₹ 1,60,47,758/- and expenditure under the head interest and financial charges have been claimed at ₹ 1,19,95,664/- therefore, the net interest income earned by the respondent during the financial year 2009-10 is at ₹ 40,52,094/-. There is no dispute from the side of Revenue to this fact that there is net interest income earned by the assessee during the year, thus with reference to part (ii) of Rule 8D(2) we are of the view that no disallowance is called for towards interest expenditure as the assessee has a net interest income during the year i.e. interest received is more than interest expenditure. Amount equal to 0.5% of the average of the value of investment, income from which does not form part of the total income - Held that - Out of the categories investments in immovable property, movable property and partnership firm are certainly not eligible to form part of average investment for the purpose of Rule 8-D. As far as investment in share is concerned, assessee has submitted that these investments were made in equity shares of Kalupur Commercial Coop. Bank Ltd. is held since last year at ₹ 54,37,500/- and assessee earns taxable dividend income and, therefore, the same should not be considered for calculation of average investment. Now the only amount left is investment in mutual fund which stood at ₹ 6,00,48,057/- as on 31.3.2009 at Rs.NIL as on 31.3.2010. Therefore, the average investment for the purpose of calculation of disallowance in part (iii) of the method provided under Rule 8D(2) of IT Rules shall be 0.5% of ₹ 3,00,24,029 (6,00,48,057 0 2). This amount works out at ₹ 1,50,120/-. Now summarizing all the three parts of Rule 8D(2), we find that in part (i) ₹ 65,753/- is the amount of admissible expenditure voluntarily disclosed by assessee and accepted by us. So no disallowance is called for. In part (ii) we have observed above that no disallowance is called for on the interest expenditure and in part (iii) we observe that 0.5% of average investment will be calculated at ₹ 1,50,120/-. Therefore, we are of the view that a disallowance of ₹ 1,50,120/- in the case of assessee is sustainable on account of disallowance u/s 14A of the Act. - Decided partly in favour of revenue

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Application of Rule 8D for calculating disallowance.
3. Nexus between interest-bearing funds and investments.
4. Calculation of disallowance on taxable and non-taxable income.
5. Assessing Officer's satisfaction with the correctness of the assessee's claim.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The primary issue revolves around the disallowance made under Section 14A of the Income Tax Act. The Assessing Officer (AO) disallowed ?27,78,024/- on the grounds that the assessee could not justify that the investments in shares were made from their own funds or funds on which no interest was paid. The AO applied Rule 8D, leading to a total disallowance of ?28,43,777/-, out of which the assessee had already disallowed ?65,753/- in its computation of income.

2. Application of Rule 8D for calculating disallowance:
The AO invoked Rule 8D read with Section 14A to compute the disallowance. The CIT(A) partly allowed the appeal by restricting the disallowance to ?6,18,396/-. The CIT(A) observed that the AO had not established any nexus between the expenditure and the investments from which exempt income was earned. The CIT(A) also noted that the assessee had sufficient interest-free funds and that the disallowance should be restricted after considering net interest expenditure.

3. Nexus between interest-bearing funds and investments:
The CIT(A) accepted the assessee's argument that the investments in partnership firms, which earned taxable interest income, should not be subject to disallowance under Section 14A. The CIT(A) directed the AO to reduce investments made in partnership firms and shares of Kalupur Commercial Co-operative Bank from the total investments considered for disallowance. The CIT(A) also accepted the appellant's contention that the closing balance of investments in mutual funds should be reduced by the share of profit received from the firm on the last day of the financial year.

4. Calculation of disallowance on taxable and non-taxable income:
The CIT(A) recalculated the disallowance under Section 14A, considering various factors such as taxable dividend income, taxable interest income, and the actual utilization of funds. The CIT(A) reduced the disallowance to ?6,18,396/- from ?27,78,024/-. The Tribunal further reviewed the calculations and noted that the assessee had sufficient own funds to cover the investments, thereby negating the need for additional disallowance on interest expenditure.

5. Assessing Officer's satisfaction with the correctness of the assessee's claim:
The Tribunal observed that the AO had not recorded any satisfaction regarding the correctness of the assessee's claim about the disallowance under Section 14A. The Tribunal referred to the decision of the co-ordinate bench in the assessee's own case for the previous assessment year, which held that no disallowance should be made if the assessee had sufficient own funds.

Tribunal's Decision:
The Tribunal partly allowed the Revenue's appeal and the assessee's cross-objection. It concluded that no disallowance was called for on the interest expenditure since the assessee had a net interest income during the year. The Tribunal upheld a disallowance of ?1,50,120/- under Section 14A, calculated as 0.5% of the average investment in mutual funds.

Conclusion:
The Tribunal's final order restricted the disallowance under Section 14A to ?1,50,120/-, considering the assessee's net interest income and the nature of investments. The decision emphasized the need for the AO to record satisfaction regarding the correctness of the assessee's claim before invoking Rule 8D for disallowance under Section 14A.

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