2016 (8) TMI 998 - AT - Income Tax

Disallowance u/s 14A r.w.s. 8D - Held that - In the given case, where the assessee has earned exempted income and also has a substantial investments in shares the provisions of section 14A of the Act for disallowance of expenditure incurred in relation to income earning dividend income is clearly attracted. We find that ld. Assessing Officer has applied the gross amount of interest expenditure of ₹ 75,53,433/- in the formula for working out proportionate disallowance of interest. In the present case, we find that assessee has also earned interest income during the year. In various decisions of Co-ordinate Benches it has been repeatedly held that at the time of calculation of disallowance of Sec.14A of the Act net interest expenditure (i.e. gross interest paid minus interest received) should be used in the formula for calculating proportionate disallowance u/s 14A of the Act. Further we also observe that ld. AR has not brought on record audited financial statements, details of investment, partners capital account, indirect income earned, which could help to calculate the actual disallowance u/s 14A of the Act. We, therefore, set aside this issue to the file of ld. Assessing Officer to recalculate the disallowance u/s 14A of the Act by using net interest paid figure at the place of gross interest paid during the year in the formula. Needless to mention that ld. Assessing Officer will provide reasonable opportunity of being heard to the assessee to produce all the necessary documents/evidences etc. in support of his claim. This ground of Revenue is allowed for statistical purposes.

Summary

Issues:
1. Disallowance u/s 14A r.w.s. 8D
2. Application of legal principles in disallowance of expenditure

Analysis:
1. The appeal was against the deletion of a disallowance of ?32,75,430 made u/s 14A of the IT Act. The assessee, a partnership firm engaged in finance and share trading, declared a loss of ?97,91,666 for the relevant year. The Assessing Officer observed dividend income, capital gains, interest income, and PMS fees. The disallowance was based on the presumption of expenditure towards shares yielding dividends. The CIT(A) deleted the disallowance, citing precedents where borrowed funds for business purposes did not require apportionment for dividend income. The Tribunal noted the partnership's various income sources, investments, and capital, indicating more than just share trading. It directed the AO to recalculate the disallowance using net interest paid for proportionate disallowance under Sec. 14A.

2. The Revenue contended that the CIT(A) erred in applying precedents as the facts did not align. The Tribunal agreed that the partnership's income sources extended beyond share trading, warranting the application of Sec. 14A for disallowance related to dividend income. It emphasized using net interest paid for the calculation. The Tribunal remanded the issue to the AO for recalculating the disallowance with necessary documentation. The appeal was allowed for statistical purposes, with no adjudication needed for the other ground.