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Facts
The Revenue filed an appeal against the CIT(A)'s order for AY 2010-11, which restricted the addition under Section 14A. The Assessing Officer had disallowed Rs.44,35,176/-, while the CIT(A) restricted it to Rs.4,61,744/-.
Held
The Tribunal held that the CIT(A) rightly deleted the disallowance of interest expenditure under Rule 8D(2)(ii) and correctly disallowed administrative expenses to the extent of Rs.4,61,744/- under Rule 8D(2)(iii), following its own order and observations.
Key Issues
Whether the CIT(A) erred in restricting the addition under Section 14A and whether the disallowance made by the Assessing Officer was justified.
Sections Cited
14A, 143(3), 147, 148, 143(2), 8D, 234B
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, AHMEDABAD “A” BENCH, AHMEDABAD
Before: DR. BRR KUMAR & Ms. SUCHITRA KAMBLE
PER SUCHITRA KAMBLE, JUDICIAL MEMBER:
This appeal is filed by the Revenue against order dated 19.11.2018, passed by the CIT(A)-3, Ahmedabad for Assessment Year 2010-11.
The Revenue has raised the following grounds of appeal:
“1. The Ld. CIT(A) has erred in law and on facts in restricting the addition to Rs.4,61,744/- as against the disallowance of Rs.44,35,176/- made by the Assessing Officer under Section 14A of the Act.
2. On the facts and circumstances of the case, Ld. CIT(A) ought to have upheld the order of the Assessing Officer.
3. It is, therefore, prayed that the order of Ld. CIT(A) may be set aside and that of the Assessing Officer be restored.”
The assessee filed his original return of income for the Assessment Year (A.Y.) 2009-10 on 14.10.2010 declaring total income at Rs.83,40,540/-. The assessment was finalised on 22.10.2012 under Section 143(3) of the Income Tax Act, 1961, Assessment Year: 2010-11 DCIT vs. Shri Hanubhai R Sangani Page 2 of 5 assessing the income of the assessee at Rs.87,10,080/-. The assessment was reopened under Section 147 of the Act and notice under Section 148 of the Act was issued on 31.03.2017. In response to the notice issued under Section 148 of the Act, the assessee filed return of income on 18.04.2017 declaring total income of Rs.83,39,040/-. The assessee was provided copy of reasons recorded for reopening the case under Section 148 vide letter dated 26.07.2017. Notice under Section 143(2) of the Act was also issued on 26.07.2017. The assessee raised objection against the reopening of the case on 23.07.2017 which was disposed of vide order dated 30.08.2017 by the Assessing Officer. The main issue on which the assessment in the assessee’s case is related to applicability of Section 14A of the Act as the assessee was having exempt income during the year and has not claimed any response against such income as per provisions of Section 14A of the Act. The Assessing Officer observed that the assessee has earned exempted income in the form of share of profit from partnership firms, dividend from shares. The assessee has invested new capital in partnership firms and has earned exempted share profit from such investments apart from earning taxable income in the form of interest and revenue from such investment. The assessee was having investment capable of earning exempt income in the form of investment in shares and Private Limited Companies. The total new investment made during the year by the assessee are Rs.7,77,26,878/- in partnership firms and Rs.1,60,592/- in shares. Since the borrowed funds have been used for making investment, as observed by the Assessing Officer, which have earned both taxable as well as exempt income, thus the Assessing Officer gave the finding that the assessee is clearly covered under the provision of Section 14A of the Act. The assessee was having exempt income to the tune of Rs.9,40,77,973/- being the share in profit earned from partnership firm and dividend from hares held. The assessee has claimed expenses of Rs.69,60,614/-. The Assessing Officer made disallowance under Section 14A i.e. amount of expenditure recorded in relation to income which does not form part of total income under the Income Tax Act as determined in accordance with the method prescribed under Rule 8D of the Act. Thus, the Assessing Officer made addition of Rs.44,35,176/-.
Being aggrieved by the Assessment Order, the assessee filed appeal before the CIT(A). the CIT(A) partly allowed the appeal of the assessee. Subsequently, the Assessment Year: 2010-11 DCIT vs. Shri Hanubhai R Sangani Page 3 of 5 Department went to appeal before the Tribunal and the Tribunal dismissed the appeal of the Revenue as per law tax effect vide order dated 29.01.2019. The Department filed Special Civil Application No.1303 of 2020 before the Hon’ble Gujarat High Court thereby challenging the order of the Tribunal passed in MA No.220/Ahd/2019 wherein the Hon’ble High Court vide order dated 09.10.2024 remanded back the matter to the file of the Tribunal thereby quashing the order dated 06.01.2020 passed in the M.A. and has given direction that the matter is remanded back to the Tribunal so as to enable the Revenue to point out the fact about audit objection which was accepted by the Revenue.
The Ld. DR placed on record the audit objection dated 31.03.2017. The relevant extract is as under :-
“In this case, assessee individual (Shri Hanubhai R. Sangani) derives income from share of profit from partnership firm E-filed his return of Income for A.Y. 2010-11 on 14/10/2010 declaring income of Rs.83,40,540/-. The return filed by the assessee was taken up for scrutiny and the assessment was completed u/s.143(3) of the Act on 22/10/2012 at Rs 87,10,080/-. The audit has raised an objection as detailed above. The objection raised by the audit is found be correct. As such, the remedial action u/s.147of the Act is suggested for which time limit expires on 31/03/2017. May 1 therefore, request your good- self to kindly accord the administrative approval for taking remedial action u/s. 147 of the income-tax Act.” The Ld. DR submitted that the CIT(A) has not taken cognisance of the audit objection and has restricted the addition to the extent of Rs.4,61,744/- as against the disallowance of Rs.44,35,176/- made by the Assessing Officer under Section 14A of the Act. The Ld. DR submitted that as per Section 14A of the Act, expenditure for earning exempt income is not an administrative deduction for computation of total income. The expenditure disallowable has to be determined as per the method prescribed under rule 8D of the IT Rules. The onus to disallow and tax the expenditure incurred to earn exempted income resulted in under-assessment of Rs.44,35,176/- with consequent short levy of tax of Rs.13,46,468/- and interest under Section 234B of the Act of Rs.4,24,824/- (for 31 months on Rs.13,64,468/-).
The Ld. AR relied upon the decision of Nirma Capital as well as the decision in the case of ITO vs Adani Infrastructure Private Limited, order dated 27.07.2015. The Ld. AR submitted that the assessee has not challenged the Assessment Year: 2010-11 DCIT vs. Shri Hanubhai R Sangani Page 4 of 5 matter before the CIT(A) as the administrative expenses which were disallowed and confirmed by the CIT(A) is not under challenge before any Court of law.
We have heard both the parties and perused all the relevant material available on record. It is pertinent to note that the assessee has invested in new capital in partnership firm and has earned exempted share profit. The argument of the assessee that it has sufficient interest-free funds available with the assessee was not accepted in view of Rule 8D by the CIT(A) and, therefore, the contention of the Ld. DR that no nexus has been established in fact has taken into account by the CIT(A) in paragraph no.3.5 of the order of the CIT(A). How much dividend the assessee has earned and whether the funds were utilised from the borrowed capital or its own capital has been considered by the CIT(A) in its order and has categorically observed that the Assessing Officer has made disallowance of proportionate interest expenditure considering interest debited in Profit & Loss account for Rs.69,60,614/- and the assessee earned interest income of Rs.1,22,46,901/-. The disallowance of interest expenditure under Rule 8D(2)(ii) of the Act made by the Assessing Officer for Rs.39,73,432/- was rightly deleted by the CIT(A) and administrative expenses to that extent amounting to Rs.4,61,744/- under Rule 8D(2)(iii) of the Act was rightly disallowed by the CIT(A). Thus, the appeal of the Revenue is dismissed.
In the result, appeal filed by the Revenue is dismissed.
Order pronounced in the open Court on this 11th April, 2025.