2021 (4) TMI 331 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - AO was of the view the borrowed fund has been utilized by the assessee in the earning of exempted income - HELD THAT - Admittedly, the own fund of the assessee exceeds the amount of investment shown in the balance sheet as on 31/03/2013. Therefore an inference can be drawn that the assessee had not utilized borrowed fund in making such investment. Thus there cannot be any disallowance on account of interest expenses as provided under Rule 8D of Rules. See RELIANCE UTILITIES POWER LTD. 2009 (1) TMI 4 - BOMBAY HIGH COURT and HDFC BANK LTD. 2014 (8) TMI 119 - BOMBAY HIGH COURT . Thus we hold that no disallowance of interest expense claimed by the assessee can be made on account of investments as discussed above. Administrative expenses disallowance - We find that the assessee has claim to have maintained separate books of accounts and accordingly the assessee has prepared separate income and expenditure account. On perusal of the income and expenditure accounts we find that the assessee has claim only bank charges and demat charges amounting to ₹ 2728.91/- only. As such we find that the assessee has not debited any other expenses in its personal income and expenditure account which the assessee might have incurred in earning such dividend income. Such administrative expenses may include accountancy expenses, electricity expenses, traveling expenses, stationary expenses, salary expenses etc. On a specific question to the Ld. AR for the assessee about the non-disallowance of other administrative expenditure, the assessee cannot make any satisfactory reply rather he agrees to confirm the disallowance made by the authorities below qua the administrative expenses. Hence we confirmed the findings of the authorities below for the disallowance of ₹ 42,079/- under the provision of section 14A r.w. Rule 8D of Rules. Thus the grounds of appeal of the assessee is partly allowed.

Summary

Issues:
- Disallowance of interest expenditure under section 14A r.w.r. 8D
- Disallowance of administrative expenses

Analysis:
1. Disallowance of Interest Expenditure under Section 14A r.w.r. 8D:
- The appellant contested the disallowance of interest expenditure amounting to ?4,31,184/- by the Assessing Officer (AO) under section 14A r.w.r. 8D of the Income Tax Rules. The AO believed that the borrowed funds were utilized by the assessee in earning exempted income, leading to the disallowance.
- The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that since the appellant earned tax-free dividend income, a disallowance for the expenditure incurred to earn such income was necessary under section 14A r.w.r. 8D. The appellant's explanation regarding the borrowed funds not being used for earning dividend income was deemed insufficient.
- The appellant argued that they had sufficient interest-free funds exceeding the investments, indicating that no disallowance of interest expenses should be made under Rule 8D. The Tribunal, after considering the facts and precedents, agreed with the appellant. Citing judgments from the Bombay High Court and Gujarat High Court, the Tribunal ruled that no disallowance of interest expenses could be made as there were enough interest-free funds to cover the investments.

2. Disallowance of Administrative Expenses:
- The appellant also challenged the disallowance of administrative expenses amounting to ?42,079/- under section 14A r.w. Rule 8D. The appellant argued that they maintained separate books of accounts and had only shown bank charges and demat charges in their personal income and expenditure account.
- The Tribunal noted that the appellant failed to provide details of other administrative expenses incurred in earning the dividend income. As the appellant could not satisfactorily explain the absence of other administrative expenses in their accounts, the disallowance of ?42,079/- for administrative expenses was confirmed.

In conclusion, the Tribunal partially allowed the appeal, ruling in favor of the appellant regarding the disallowance of interest expenditure but upholding the disallowance of administrative expenses. The judgment was pronounced on 22/02/2021 at Ahmedabad.