2017 (9) TMI 166 - HC - Income Tax

Addition u/s 14A - interest paid on the borrowed funds utilized for making investment in shares yielding exempt income - Addition made on account of purported management/administrative expenses and other costs attributed towards earning dividend income - ITAT deleted additions - Held that - A perusal of the impugned order passed by the ITAT reveals that both the disallowances were made by the AO on ad hoc basis. The ITAT relied on the order passed earlier by a coordinate Bench of the ITAT for AY 2000- 2001 deciding an identical issue in favour of the Assessee. The ITAT noted that there was no change in the facts and circumstances or the legal position requiring a different view to be taken. In any event, the Court finds that the disallowances were made by the AO on ad hoc basis. As explained by this Court in CIT v. State Trading Corporation Ltd. 2012 (8) TMI 1092 - DELHI HIGH COURT , even prior to Rule 8D, the disallowance under Section 14 A of the Act had to be on some reasonable basis. - Decided in favour of assessee.

Summary

Issues:
1. Appeal under Section 260A of the Income Tax Act against ITAT order for AY 2001-2002.
2. Disallowance of interest paid on borrowed funds for investment in shares yielding exempt income.
3. Deletion of management/administrative expenses and other costs attributed to earning dividend income.

Analysis:
1. The appeal was filed by the Revenue against the ITAT order for AY 2001-2002. The main question raised was regarding the correctness of ITAT's decision in confirming the deletion of an addition made by the AO under Section 14A for interest paid on borrowed funds used for investments in shares yielding exempt income.

2. The ITAT also deleted the addition of Rs. 25 lakhs made by the AO for purported management/administrative expenses and other costs related to earning dividend income. The ITAT's decision was based on a previous order by a coordinate Bench for AY 2000-2001, where a similar issue was decided in favor of the Assessee. The ITAT found no change in facts or legal position necessitating a different view.

3. The High Court observed that both disallowances were made by the AO on an ad hoc basis. Referring to a previous decision in CIT v. State Trading Corporation Ltd., the Court emphasized that even before Rule 8D, disallowances under Section 14A had to be based on a reasonable basis. After hearing arguments from both sides, the Court declined to frame any question of law and dismissed the appeal without costs.