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2019 (10) TMI 703 - AT - Income TaxDisallowance u/s 14A read with Rule 8D - disallowance of interest expenditure incurred by assessee for earning of exempt income - CIT(A) restricted the disallowance under Rule 8D(2)(iii) being 0.5% of average value of investments - HELD THAT - Assessee s interest free funds available are more than the investment made in the instruments giving tax free income i.e. the dividend. It is also a fact that the assessee has earned dividend income. Hence, in view of the above fund position we are of the view that in view of the decision of Hon'ble Bombay High Court in the case of HDFC Bank Ltd vs. DCIT 2014 (8) TMI 119 - BOMBAY HIGH COURT the presumption of investment in instrument giving rise to exempt income is out of interest free funds available with the assessee is in favor of assessee. Hence, we are of the view that the CIT(A) has rightly deleted the addition and we confirm the same. Disallowance of expenses relatable to exempt income under section 14A read with Rule 8D(2)(iii) of the Rules, being administrative expenses - HELD THAT - We remand this issue back to the file of the AO, who will examine the facts of the case and will disallow the expenses relatable to exempt income by computing 0.5% of average value of investment under Rule 8D(2)(iii) of the Rules, only qua the investments which give exempt income. The AO will restrict the disallowance to that extent only. The issue of the assessee s appeal is restored back to the file of the AO. Addition made on account of interest income on accrual basis instead of due basis - HELD THAT - CIT(A) allowed the claim of assessee by relying on the decision of Hon ble Bombay High Court on assessee s own case 2013 (2) TMI 893 - BOMBAY HIGH COURT as well as on various Tribunal judgments in assessee s own case Disallowance of broken period interest which was added as capital expenditure by the AO - HELD THAT - Respectfully following the Tribunal decision in assessee s own case for earlier years, we upheld the order of CIT(A) deleting the disallowance of broken period interest. This issue of Revenue s appeal is dismissed.
Issues Involved:
1. Disallowance of expenses related to exempt income under Section 14A read with Rule 8D. 2. Deletion of addition of interest income on accrual basis instead of due basis. 3. Deletion of disallowance of broken period interest treated as capital expenditure. Issue-wise Detailed Analysis: 1. Disallowance of Expenses Related to Exempt Income: The first common issue in these cross appeals pertains to the disallowance of expenses related to exempt income by the Assessing Officer (AO) under Section 14A read with Rule 8D of the Income-tax Act, 1961. The Commissioner of Income Tax (Appeals) [CIT(A)] restricted the disallowance under Rule 8D(2)(iii) to 0.5% of the average value of investments, amounting to ?28.20 lakhs. The assessee contended that the CIT(A) erred in confirming the AO's action and argued that the provisions of Section 14A and Rule 8D were not applicable as the investments were held as stock-in-trade. The Revenue, on the other hand, raised grounds against the deletion of interest expenditure under Rule 8D(2)(ii), arguing that the CIT(A) incorrectly relied on judgments that were not applicable in this context. Upon hearing the rival contentions, the Tribunal noted that the AO did not state that the assessee invested interest-bearing funds in instruments yielding exempt income. The CIT(A) deleted the addition after reviewing the fund position and investments made by the assessee. The Tribunal upheld the CIT(A)'s decision, citing the Bombay High Court's presumption in favor of the assessee that investments in instruments yielding exempt income were made from interest-free funds. However, the Tribunal remanded the issue of disallowance of administrative expenses back to the AO for re-examination, instructing the AO to disallow expenses only to the extent of 0.5% of the average value of investments yielding exempt income. 2. Deletion of Addition of Interest Income on Accrual Basis: The next issue raised by the Revenue was against the CIT(A)'s deletion of an addition of ?86,25,94,874/- made by the AO on account of interest income on an accrual basis instead of a due basis. The AO noted that the assessee credited interest to the profit and loss account but reduced the same amount in the computation of income, treating the differential amount as interest that accrued but did not become due. The CIT(A) allowed the assessee's claim, relying on the Bombay High Court's decisions in the assessee's own case for previous years. The Tribunal found no infirmity in the CIT(A)'s order, noting that the CIT(A) had appropriately relied on various High Court and Tribunal judgments in the assessee's favor. Consequently, the Tribunal dismissed the Revenue's appeal on this issue. 3. Deletion of Disallowance of Broken Period Interest: The final issue raised by the Revenue was against the CIT(A)'s deletion of a disallowance of ?29,32,55,778/- on account of broken period interest, which the AO treated as capital expenditure. The AO argued that broken period interest was part of the price paid for acquiring securities and should be treated as capital outlay. The CIT(A), however, allowed the assessee's claim, citing the Supreme Court's decision in CIT vs. Citi Bank NA and the Bombay High Court's decision in American Express vs. CIT. The Tribunal noted that the issue of broken period interest had been consistently decided in favor of the assessee in previous years by both the CIT(A) and the Tribunal. The Tribunal upheld the CIT(A)'s order, following the precedent set in the assessee's own case for earlier years, and dismissed the Revenue's appeal on this issue. Conclusion: In conclusion, the Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on the issues of disallowance of expenses related to exempt income, deletion of addition of interest income on an accrual basis, and deletion of disallowance of broken period interest. The Tribunal's order was pronounced in the open court on 24.07.2019.
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