2018 (5) TMI 255 - AT - Income Tax

Disallowance u/s 14A - Distinction for the disallowance u/s 14A in a case where the dividend was credited to the bank directly - sufficiency of own funds - Held that - We find from the perusal of the balance sheet of the assessee that the assessee is having sufficient own funds at its disposal for the purpose of making investments and accordingly it could be held that no borrowed funds were utilized for making investments. This factual issue had already been considered in assessee s own case by this tribunal in ITA No. 2016 (5) TMI 978 - ITAT KOLKATA for the Asst Year 2007-08 had categorically held that all the investments were made only out of own funds of the assessee and not out of borrowed funds. Hence there cannot be any disallowance of interest under second limb of Rule 8D(2) of the Rules. We find that during the year under appeal, the same old investments were brought forward from earlier years. Moreover, the profits of the assessee for the year also has increased during this year and investments had decreased during the year. Case of Pr.CIT vs Rasoi Ltd 2017 (2) TMI 863 - CALCUTTA HIGH COURT followed. No disallowance towards Interest under second limb of Rule 8D(2) of the Rules is warranted With regard to disallowance under Rule 8D(2)(iii) of the Rules, we hold that only investments yielding exempt income should be considered for the purpose of working out disallowance thereon, in consonance with the decision rendered by this tribunal in the case of REI Agro Ltd 2013 (9) TMI 156 - ITAT KOLKATA . Accordingly we direct the AO to recompute the disallowance under the third limb of Rule 8D(2) of the Rules accordingly

Summary

Issues:
Adjudication of disallowance u/s 14A of the Income Tax Act.

Analysis:
The appeal was re-examined for the limited purpose of adjudicating the disallowance made by the AO under section 14A of the Act. The assessee earned dividend income claimed as exempt u/s 10(34) of the Act. The AO invoked Rule 8D for disallowance, which was confirmed by the ld CITA. The assessee contended that no direct expenditure was incurred in earning the dividend income as it was received in the bank directly. The AO disallowed expenses under three heads: direct expenses, interest expenses, and administrative expenses. The assessee challenged the disallowance on various grounds.

The Tribunal found that the assessee had sufficient own funds for making investments, with no borrowed funds utilized. Previous tribunal decisions and High Court rulings supported this finding. The Tribunal emphasized that all investments were made out of the assessee's own funds, and there was no nexus between borrowed funds and investments generating exempt income. The Tribunal cited the case of Pr.CIT vs Rasoi Ltd, where disallowance under section 14A was deleted due to lack of borrowed fund utilization for investments.

Regarding disallowance under Rule 8D(2)(iii), the Tribunal directed the AO to consider only investments yielding exempt income for the disallowance calculation, following precedent set by previous tribunal decisions. The Tribunal instructed the AO to recompute the disallowance under Rule 8D(2)(iii) while reducing the disallowance already made by the assessee in the return of income.

Ultimately, the Tribunal allowed the grounds raised by the assessee for statistical purposes and allowed the appeal on the limited aspect of disallowance u/s 14A of the Act for statistical purposes. The order was pronounced on 02.05.2018 by the Tribunal.