2019 (8) TMI 978 - AT - Income Tax

Disallowance u/s. 14A r.w. Rule 8D - sufficiency of own funds - HELD THAT - Facts demonstrate that assessee company had sufficient own fund for making investment in the shares. After placing reliance on the decision for Mumbai High Court in the case of Reliance Utilities and Power 2009 (1) TMI 4 - BOMBAY HIGH COURT with regard to investment in tax free securities out of assessee s own fund and considering the other judicial decisions referred by the assesssee we are not inclined with the decision of ld. CIT(A) in sustaining the impugned addition made by the assessing officer without giving reason for its justification therefore we are of the view that no interest expenditure should be disallowed u/s. 14A r.w. rule 8D in the case of the assessee. Regarding administrative expenditure we are of the view that no exempt income can be earned without incurring any administrative expenditure therefore we restore this issue of computing administrative expenditure incurred for earning exempt income to the file of assessing officer and direct the assessing officer to compute administrative expenditure @ 0.5% of investment from which the assessee has earned the tax free income. Therefore the appeal of the assessee is partly allowed.

Summary

Issues involved:
Disallowance under section 14A of the Income Tax Act

Detailed Analysis:

Issue 1: Disallowance under section 14A of the Income Tax Act
The case involved the disallowance made by the assessing officer under section 14A of the Income Tax Act concerning exempt dividend income earned by the assessee. The assessing officer disallowed expenses related to earning exempt income under Rule 8D of the IT Rule, as the assessee failed to provide evidence that no interest-bearing funds were utilized for making investments generating exempt income. The disallowance was computed at ?94,76,690 and added to the total income of the assessee. The ld. CIT(A) upheld the disallowance, leading to an appeal before the ITAT.

Issue 2: Arguments and Evidence
During the appellate proceedings, the assessee contended that investments were made from its interest-free funds and challenged the disallowance. The counsel presented a paper book with relevant information and submissions made during the assessment and appellate proceedings. The counsel cited various legal precedents to support the argument that no interest expenditure should be disallowed under section 14A. The counsel highlighted the balance sheet showing interest-free funds exceeding investments, emphasizing that the assessee had sufficient own funds for investments.

Issue 3: ITAT's Decision
After reviewing the material on record, the ITAT observed that the assessee had surplus own funds, as evidenced by the balance sheet, to cover the investments made. Citing legal precedents and the Mumbai High Court decision in a similar case, the ITAT disagreed with the CIT(A)'s decision and ruled that no interest expenditure should be disallowed under section 14A. However, concerning administrative expenditure, the ITAT acknowledged that earning exempt income would involve administrative costs. Therefore, the ITAT directed the assessing officer to compute administrative expenditure at 0.5% of the investment generating tax-free income. Consequently, the appeal of the assessee was partly allowed.

In conclusion, the ITAT set aside the disallowance of interest expenditure under section 14A but instructed the assessing officer to calculate administrative expenditure for earning exempt income. The decision was based on the availability of interest-free funds for investments and the necessity of incurring administrative expenses for earning exempt income.