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2017 (6) TMI 135 - AT - Income TaxDisallowance of expenses made invoking the provisions of section 14A - sufficiency of funds - Held that - In the absence of satisfaction recorded by the Assessing Officer vis- -vis the incorrectness of the claim of the assessee of expenses disallowable u/s 14A of the Act and further on account of sufficient own funds available with the assessee for the purpose of making investments which earned exempt income, the disallowance of ₹ 27,20,584/- made u/s 14A of the Act was unwarranted in the present case. The order of the Ld.CIT(Appeals) is, therefore, set aside on this count and the disallowance made u/s 14A is directed to be deleted. - Decided in favour of assessee.
Issues Involved:
1. Legality of the order passed by the CIT(A). 2. Disallowance of expenses under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962. 3. Satisfaction of the Assessing Officer regarding the incorrectness of the claim of the assessee. 4. Availability of sufficient own funds for making investments. Issue-Wise Detailed Analysis: 1. Legality of the Order Passed by the CIT(A): The assessee contended that the order passed by the CIT(A) was based on conjectures and surmises without appreciating the material on record. The CIT(A) upheld the disallowance made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, 1961, by applying Rule 8D of the Income Tax Rules, 1962. 2. Disallowance of Expenses Under Section 14A: The primary issue in both appeals was the disallowance of expenses under Section 14A. The assessee had earned dividend income, which was exempt from tax, and had disallowed a certain amount as expenditure towards earning this exempt income. The AO, however, computed the disallowance by applying Rule 8D, resulting in a higher disallowance. 3. Satisfaction of the Assessing Officer: The assessee argued that the AO did not record proper satisfaction regarding the incorrectness of the claim made by the assessee. The AO disbelieved the assessee's claim based on the proportion of expenses incurred on employees and interest expenses. The Tribunal noted that the AO's satisfaction was not based on credible and relevant evidence, as required by the jurisdictional High Court in the cases of Abhishek Industries Ltd. and Deepak Mittal. The AO's general observations were insufficient to disallow the claim under Section 14A. 4. Availability of Sufficient Own Funds: The assessee demonstrated that it had sufficient own funds to make the investments, which earned the exempt income. The Tribunal found merit in this argument, noting that the assessee's own interest-free funds were sufficient to cover the investments. The Tribunal also noted that the total finance cost incurred by the assessee was minimal and not related to borrowing charges. Conclusion: The Tribunal held that the disallowance made under Section 14A was unwarranted due to the lack of proper satisfaction recorded by the AO and the availability of sufficient own funds with the assessee. The disallowance of ?27,20,584/- was directed to be deleted, and the appeal of the assessee was allowed. The same findings were applied to the subsequent appeal for the assessment year 2013-14, resulting in the deletion of the disallowance of ?28,88,140/-. Order Pronounced: Both appeals of the assessee were allowed, and the disallowances made under Section 14A were directed to be deleted.
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