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2021 (6) TMI 174 - AT - Income TaxDisallowance under section 14A r.w.r. 8D - interest expenditure considered for disallowance - HELD THAT - CIT(A) deleted the disallowances by following the order of ITAT, Ahmedabad ITO Vs. Karnavati Petrochem P.Ltd. 2014 (1) TMI 920 - ITAT AHMEDABAD wherein it was held that when the interest income was more than the interest expenses, and the assessee was having net positive interest income, the interest expenditure could not be considered for disallowance under section 14A - We find that the ld. CIT(A) also examined the reserve and surplus fund available with the assessee company, which is more than the investment made by assessee for earning exempt income. No contrary fact or law is brought to our notice by the Revenue to take a different view. Therefore, the ground of appeal raised by revenue in its appeal for A.Y. 2009-10 is dismissed. Administrative expenses addition - CIT(A) has restricted the same at 0.5% of average value of investment, as per Rule 8D(2)(iii) - We find that the assessee has claimed that no expenditure was incurred for earning exempt income, therefore, the assessee prayed since the same being on higher side, a reasonable disallowance be made. ld.CIT(A) has determined the administrative same on adhoc basis, and no nexus has been made between the expenditure incurred and the exempt income. Therefore, to meet the ends of justice, we restrict the disallowance to ₹ 1,50,000/- in each assessment year under appeal. This ground is accordingly allowed.
Issues:
1. Disallowance under section 14A of the Act for two assessment years. 2. Dispute over the disallowance of administrative expenses. 3. Appeal by the Revenue and the assessee against orders of the ld.CIT(A). Issue 1: Disallowance under section 14A of the Act: The appeals involved cross-appeals by the Revenue and the assessee regarding orders of the ld.CIT(A) for two assessment years. The Revenue raised the issue that the ld.CIT(A) erred in restricting disallowance under section 14A. The assessee challenged the disallowance of administrative expenses under Rule 8D(2)(iii) of the Income Tax Rules. The Tribunal recalled the order to list the appeals for adjudication on merit. The ld.CIT(A) deleted the disallowance under section 14A, citing that the assessee had interest income exceeding interest expenses, thereby no disallowance was necessary. However, the ld.CIT(A) upheld the disallowance of administrative expenses at 0.5% of the average value of investment under Rule 8D(2)(iii). Issue 2: Dispute over the disallowance of administrative expenses: The Revenue contended that the assessee did not provide evidence to show that surplus funds or interest-free funds were used for investments generating exempt income. The ld.AO invoked section 14A and Rule 8D due to lack of demonstrative evidence. The assessee supported the orders of the ld.CIT(A), arguing that no disallowance should occur under Rule 8D when there is net interest income. The Tribunal found that the ld.CIT(A) correctly deleted the disallowance of interest expenditure and restricted administrative expenses to a lump sum disallowance of &8377; 1,50,000 in each assessment year. Issue 3: Appeal by the Revenue and the assessee: The Tribunal dismissed the Revenue's appeal for the A.Y.2009-10 but partially allowed the assessee's appeal. The disallowance of administrative expenses was restricted to &8377; 1,50,000 in each assessment year. The Tribunal applied the same reasoning to the A.Y. 2010-11, disposing of both Revenue's and the assessee's appeals accordingly. The Revenue's appeals were dismissed, and the assessee's appeals were partly allowed. In conclusion, the Tribunal upheld the decision to delete the disallowance under section 14A due to the assessee's interest income exceeding expenses. The disallowance of administrative expenses was restricted to a lump sum amount, providing a balanced resolution to the dispute between the Revenue and the assessee.
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