SARANG RAKESHKUMAR WADHAWAN,MUMBAI vs. ACIT CEN CIR 5(4), MUMBAI

The assessee is aggrieved by the decision of the learned CIT(A) in partially confirming the disallowance made by the AO under Section 14A of the Income Tax Act (hereinafter “the Act”).

The facts relating to the issue are stated in brief. The assessee has declared salary income from M/s. Housing Development Infrastructure Ltd., interest and other income under the head ‘Income from other sources’ and also shown loss from F&O trading. The AO noticed that the assessee has received dividend income of `289.78 lakhs and claimed the same to be exempt. However, the assessee did not make any disallowance under Section 14A of the Act. The AO took the view that the assessee could not Shri Sarang Rakeshkumar Wadhawan have earned income without incurring administrative expenses. Accordingly he disallowed a sum of `31.31 lakhs as per Rule 8D(2)(iii) of the I.T. Rules.

The learned CIT(A) noticed that the assessee has claimed administrative expenses only to the tune of `27,282/-. Accordingly he took the view that the disallowance of `31.31 lakhs made by the AO towards administrative expenses under Rule 8D(2)(iii) is far in excess of actual expenses. Accordingly he restricted the disallowance of administrative expenses to 50% of the actual expenses, i.e. 50% of `27,282/- which worked out to `13,641/-. The learned CIT(A) also noticed that the assessee incurred DMAT expenses towards purchase and sale of shares and accordingly allocated 50% thereof to dividend income under Rule 8D(2)(i) of the I.T. Rules. With regard to disallowance out of interest expenditure as per Rule 8D(2)(ii) of the I.T. Rules, the learned CIT(A) computed the average value of investment by taking only those shares which yielded tax free income and accordingly disallowed a sum of `27.47 lakhs out of interest expenditure. The assessee is still aggrieved.

The learned A.R. submitted that the assessee has borrowed funds for specific purpose of carrying out F&O activity and hence the learned CIT(A) was not justified in making disallowance under Rule 8D(2)(ii) out of interest expenditure. He submitted that the interest expenses are directly related to F&O activity and it should not have been taken for computing disallowance under Section 14A of the Act.

On the contrary, the learned CIT-DR submitted that the learned CIT(A) has fairly computed the disallowance out of interest expenditure by considering only those investments which have yielded dividend income during the year under consideration. In this regard the learned CIT-DR invited our attention to para 5.3.3 of the order passed by the learned CIT(A).

In rejoinder the learned A.R. submitted that under the provisions of Rule 8D(2)(ii), interest expenditure can be disallowed only if the user of borrowed funds was mixed one and nexus could not be established.

Having heard the rival submissions we noticed that the assessee is not aggrieved by the decision rendered by learned CIT(A) in respect of disallowance made under Rule 8D(2)(i) to 8D(2)(iii) of the I.T. Rules. He is aggrieved with the interest disallowance computed by the Ld CIT(A) under rule 8D(2)(ii) of the I T Rules. The contention of the assessee is that borrowed funds have been used for F&O activity and the assessee could prove the same by establishing nexus between borrowings and its use. If the assessee is able to establish the borrowings with its use for F&O activity, in our view, the interest expenditure pertaining to those loans should be considered as directly related to F&O activity. Accordingly the same should not be considered for computing disallowance under Rule 8D(2)(ii) of the I.T. Rules. However, the claim of the assessee needs examination by the AO. Accordingly we set aside the order of the learned CIT(A) in respect of disallowance computed under Rule 8D(2)(ii) of the I.T. Rules and restore the same to the file of the AO for examining it afresh in the light of the discussion made supra. After considering the information and explanation furnished by the assessee the AO may take appropriate decision in accordance with law.

In the result, the appeal filed by the assessee is treated as allowed for statistical purposes.