2017 (3) TMI 1325 - AT - Income Tax

Disallowance made u/s. 14A r.w.r. 8D - Held that - There is no finding given by the AO or CIT(A) that any of the borrowed funds have been diverted for investments in shares. Eventhough the Ld.CIT(A) discussed the principles of law he did not examine whether any of the borrowed funds have been diverted for investment. Unless the funds were out of the borrowed funds no disallowance is warranted under rule 8D(2)(ii) It was the contention that borrowed funds were utilised in the business of assessee. Assessee s contention that AO has not disallowed any amount u/s. 36(1)(iii) has a valid point. Invoking Rule 8D(2) will only come with reference to other interest which was not directly related to the business. Since there is no finding by the AO that the interest claim is not for the purpose of business in my opinion invoking section 14A and disallowance on on a proportionate basis is not correct. As seen from the record also most of the funds were borrowed in earlier years substantial amount was also invested in earlier years. There seems to be no disallowance in earlier years u/s. 14A. In view of that the disallowance u/s. 8D(2)(ii) cannot be sustained. Coming to the issue of disallowance u/s. 8D(2)(iii) i.e. 0.5% on the average investments assessee s contention was that no such disallowance was warranted as no income was earned during the year. However it cannot be stated that assessee has not utilised its personnel and efforts to make investments in the shares. There will be some expenditure involved which cannot be quantified. Therefore Rule 8D(2)(iii) provides for estimation of expenditure for 0.5% of average investments.

Summary

Issues Involved:
1. Disallowance made under Section 14A read with Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D(2)(ii):

The Assessing Officer (AO) observed that the assessee invested ?3,22,40,000 in equity shares and claimed a finance cost of ?20,14,653 in the Profit and Loss account. Invoking Section 14A, the AO disallowed a proportionate interest of ?6,67,992 under Rule 8D(2)(ii). The assessee contested this disallowance, arguing that the interest was claimed on funds used for business purposes and no part was diverted for investment in shares. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision. However, the Tribunal noted that neither the AO nor the CIT(A) provided any finding that borrowed funds were diverted for investments in shares. The Tribunal emphasized that unless funds were borrowed for investments, no disallowance is warranted under Rule 8D(2)(ii). The Tribunal found that most funds were borrowed in earlier years and substantial amounts were invested in earlier years without any disallowance under Section 14A. Consequently, the disallowance of ?6,67,992 under Rule 8D(2)(ii) was deleted.

2. Disallowance under Section 14A read with Rule 8D(2)(iii):

The AO also disallowed ?1,44,445 under Rule 8D(2)(iii), which is 0.5% of the average investment. The assessee argued that no income was received during the year that was claimed as exempt, thus disallowance was not warranted. The Tribunal referred to the Co-ordinate Bench's decision in the case of Bellwether Microfinance Fund Pvt. Ltd., which clarified that while disallowance under Rule 8D(2)(i) relates to income earned that does not form part of total income, Rule 8D(2)(iii) pertains to the average value of investment irrespective of income earned. The Tribunal concluded that even if no income was earned, some expenditure is involved in maintaining investments. Thus, the disallowance under Rule 8D(2)(iii) was confirmed at ?1,44,445.

Conclusion:

The Tribunal partly allowed the appeal, deleting the disallowance of ?6,67,992 under Rule 8D(2)(ii) but confirming the disallowance of ?1,44,445 under Rule 8D(2)(iii). The final order was pronounced in the open court on 22nd March 2017.