2018 (8) TMI 274 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - specific disallowance of interest u/s 14A - Held that - We find that the assessment year under consideration is 2008-09. It is from this year onwards that the mandate of Rule 8D has come into force. All the Hon ble High Courts are unanimous that the disallowance u/s 14A is to be made only on reasonable basis up to assessment year 2007-08. Such a disallowance has to be made in a holistic manner de hors any reference to individual items of expenses, including interest, as is the position under rule rule 8D applicable from the year under consideration. Thus, it is graphically clear that the question of specific disallowance of interest u/s 14A read with rule 8D is and could have occurred for the first time in the year in question and there can be no presumption that the AO accepted in the preceding year that no interest bearing funds were utilized by the assessee in making the investments in respect of opening balance of investments, so as to disable him from making disallowance of interest under rule 8D, even if it is proved that interest bearing funds were utilized for the purpose. Ergo, this contention of the ld. AR is jettisoned. It is, therefore, directed that the Assessing Officer will examine the question of disallowance of interest under Rule 8D(2)(ii) in the above hue and compute the same after allowing opportunity of being heard to the assessee. As decided in CIT vs. Holcim India P. Ltd. 2014 (9) TMI 434 - DELHI HIGH COURT that if there is no exempt income, there can be no question of making any disallowance u/s 14A. A fortiori, the disallowance u/s 14A of the Act has to be restricted to the amount of exempt income. As such, we direct that the disallowance computed by the Assessing Officer in the fresh proceedings should not cross the amount of exempt dividend income of ₹ 3,38,62,672/- - Assessee s appeal is partly allowed for statistical purposes.

Summary

Issues:
1. Disallowance under section 14A of the Income-tax Act, 1961 read with Rule 8D.
2. Calculation of disallowance of interest expenditure.
3. Computation of disallowance under Rule 8D(2)(iii).
4. Consideration of average value of investments for disallowance.
5. Application of Rule 8D for the first time in the assessment year.
6. Disallowance of interest expenditure based on borrowed funds.
7. Precedents regarding disallowance of interest under Rule 8D.
8. Disallowance of interest on opening balance of investments.
9. Disallowance of interest under Rule 8D(2)(ii) in the absence of exempt income.

Analysis:
1. The appeal pertains to the disallowance of &8377; 9,12,39,472 made under section 14A of the Income-tax Act, 1961 read with Rule 8D. The Assessing Officer invoked Rule 8D to compute the disallowance, which was confirmed by the CIT(A). The Tribunal noted that Rule 8D is prospective and applicable from the assessment year 2008-09, justifying its invocation in the present case.

2. The calculation of disallowance of interest expenditure amounting to &8377; 8,53,28,239 under Rule 8D(2)(ii) was scrutinized. The Tribunal found discrepancies in the approach adopted by the authorities below. The matter was remitted to the Assessing Officer for a reevaluation considering all aspects before making the disallowance of interest.

3. Regarding the computation of disallowance under Rule 8D(2)(iii), it was observed that the average value of investments should only include securities yielding exempt income. Citing precedents, the Tribunal directed the AO to recompute the disallowance by considering investments that generated exempt income during the year.

4. The issue of disallowance of interest expenditure based on borrowed funds was discussed. The Tribunal emphasized the need for a comprehensive assessment of the source of funds utilized for investments before making any disallowance under Rule 8D(2)(ii). The matter was sent back to the AO for a fresh adjudication.

5. The Tribunal rejected the contention that no disallowance of interest could be made in respect of the opening balance of investments if accepted in previous years. It clarified that the applicability of Rule 8D for the first time in the assessment year 2008-09 allowed for specific disallowance of interest under the rule.

6. The Tribunal highlighted that disallowance under section 14A should not exceed the amount of exempt income earned by the assessee. Citing relevant judgments, it directed the AO to ensure that the disallowance did not surpass the exempt dividend income of &8377; 3,38,62,672. The appeal was partly allowed for statistical purposes.