2023 (12) TMI 349 - HC - Income Tax

Disallowance u/s 14A r.w.r. 8D - assessee had made a suo motu disallowance - HELD THAT - In a series of judgments it has been held that the disallowance u/s 14A r.w.r. 8D of the Rules cannot exceed the exempt income. Therefore, to our minds, the addition made by the AO, which was sustained by the CIT(A), was wholly unsustainable and thus, according to us, the Tribunal correctly deleted the addition. Disallowance of interest expenses - Utilization of loan for purchase of shares - ITAT deleted the additions - Counsel for respondent / assessee contended that, Revenue, at the fag end of the proceedings came up with the argument that the CIT(A) had taken recourse to an alternate rationale based on the provisions of Section 36(1)(iii) - Revenue contention that although the AO was right in holding that in the balance sheet for FY in issue i.e., FY 2007-08, a part of the shares bought concerning Reliance Industries Ltd. (RIL) was shown as long term investment, they were sold and the profit earned therefrom was offered for imposition of tax. Mr Jain, thus, went on to state that the profit on the sale of all the shares mentioned in Table- II above, which included shares of RIL (except Reliance Liquid Fund) was Rs. 7,10,34,493/-, which as indicated above, was offered for levy of tax. Therefore, the argument advanced by Mr Jain was that notwithstanding the depictions in the balance sheet, once the appellant/revenue has accepted the transaction as one concerning the sale of shares held as stock-in-trade, neither the CIT(A) nor the AO could have made an addition qua interest paid on loan availed by the respondent/assessee. We tend to agree revenue. The borrowings were for the purpose of business. The shares bought from borrowed funds were sold and this profit earned was offered for levy of tax, which was accepted by the appellant/revenue. It is perhaps for this reason that the question proposed by the appellant/revenue does not raise the issue concerning the application of borrowed funds for long-term investment, and hence unavailability of deductions qua interest accrued on it See Section 36(1)(iii) . The question, as proposed, is confined to the disallowance made under Section 14A of the Act read with Rule 8D of the Rules. In any event, the well-established principle is that the manner of treatment of an item concerning expenditure and income in the books of accounts or financial statement does not determine its liability under the Act See Kedarnath Jute Mfg. Co. Ltd. v. Commissioner of Income Tax, (Central), Calcutta 1971 (8) TMI 10 - SUPREME COURT At this juncture, the appellant/revenue cannot spring upon the respondent/assessee a new case which is not articulated in the appeal preferred before us. Thus as the exempt income was only Rs. 35,347/-, the disallowance ordered by the AO amounting to Rs. 5,06,73,874/- could not have been made in view of the position in law

Summary

Issues involved:
The appeal concerns Assessment Year (AY) 2008-09. The appellant/revenue seeks to challenge the order passed by the Income Tax Appellate Tribunal regarding an addition made under Section 14A of the Income Tax Act, 1961.

Assessment of Addition under Section 14A:
The Assessing Officer (AO) made an addition of Rs. 5,06,73,874 under Section 14A of the Act read with Rule 8D of the Rules. The Commissioner of Income Tax (Appeals) confirmed this addition, but the Tribunal later deleted it.

Dispute over Exempt Income and Disallowance:
The respondent/assessee had earned exempt income of Rs. 35,347 in the relevant period, against which a suo motu disallowance of Rs. 87,442 was made. However, the AO added a substantial amount to the income based on Rule 8D calculations, which exceeded the exempt income.

Legal Interpretation and Precedents:
Various judgments have emphasized that the disallowance under Section 14A with Rule 8D cannot exceed the exempt income. The Tribunal correctly deleted the addition as it was unsustainable and not in line with legal principles.

Alternate Rationale and Argument:
The CIT(A) had also upheld the addition based on Section 36(1)(iii) of the Act, citing the utilization of borrowed capital for investments. However, the respondent argued that the borrowed funds were used for business purposes, and the profit was declared for tax. The court agreed with this interpretation.

Conclusion and Decision:
The court found that the disallowance made by the AO was unjustified and exceeded the exempt income. The appeal was closed as no substantial question of law arose for consideration, affirming the Tribunal's decision to delete the addition.