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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the Revenue is directed against the order of the Commissioner of Income Tax (Appeals) – 1, Madurai, dated 11.03.2016 and pertains to assessment year 2012-13. The assessee has also filed cross-objection against the very same order of the CIT(Appeals). Therefore, we heard the appeal and the cross- objection together and disposing of the same by this common order.
The only issue arises for consideration in the appeal is with regard to disallowance made by the Assessing Officer under Section 14A of the Income-tax Act, 1961 (in short "the Act").
Shri A.V. Sreekanth, the Ld. Departmental Representative, submitted that the Assessing Officer computed the disallowance under Rule 8D(2) of the Income-tax Rules, 1962. However, the CIT(Appeals) partly deleted the disallowance made by the Assessing Officer on the ground that the disallowance cannot exceed the dividend income received by the assessee. According to the Ld. D.R., the method for computing the expenditure was prescribed in Rule 8D(2). All the three limbs of Rule 8D(2) have to be taken into consideration for the purpose of computing the disallowance for earning the exempt income. In this case, the assessee has borrowed the money and paid interest. Even though the assessee claims that borrowed funds were used for the purpose of business, according to the Ld. D.R., limb (ii) of Rule 8D(2) of Income-tax Rules, 1962 would come into operation since the payment of interest is not relatable to any particular income. The CIT(Appeals) himself observed that the borrowed funds and the assessee’s own funds got mixed up and it is not possible to identify the specific borrowals for the purpose of investment in shares. If that is so, Rule 8D(2)(ii) has to be necessarily applied. Moreover, 0.5% of investment made during the year, which resulted for earning of income which does not form part of total income, also needs to be taken into consideration. In view of the express language of Rule 8D(2), according to the Ld. D.R., the CIT(Appeals) is not justified in restricting the disallowance made by the Assessing Officer.
On the contrary, Shri K. Paramanandam, the Ld. representative for the assessee, submitted that the disallowance under Section 14A of the Act shall be restricted to exempt income earned by the assessee. Since there was no proximity between the borrowed funds and investment, the Assessing Officer cannot apply the provisions of Rule 8D(2). Moreover, the Assessing Officer has not recorded any satisfaction for the purpose of making disallowance. According to the Ld. representative, Section 14A of the Act could be applied only in the case where the assessee earned exempt income which does not form part of total income.
Therefore, the CIT(Appeals) has rightly allowed the claim of the assessee.
We have considered the rival submissions on either side and perused the relevant material available on record. We have carefully gone through the provisions of Section 14A of the Act and Rule 8D of the Income-tax Rules, 1962. Rule 8D(2) provides for method of computation of disallowance for the purpose of making disallowance under Section 14A of the Act. Section 37 of the Act specifically provides for allowance of expenditure for the purpose of earning the income. An exception was taken from Section 37 by providing Section 14A of the Act that the expenditure which is not incurred for earning the taxable income cannot be allowed while computing the taxable income. In the case before us, the assessee admittedly invested in shares which resulted in dividend. The dividend income earned by the assessee is exempted from taxation.
Therefore, the expenditure incurred by the assessee for earning the dividend income, which does not form part of total income, cannot be allowed while computing the taxable income.
Rule 8D(2) provides method for computing disallowance.
The first limb of 8D(2) of the Act provides for disallowance of direct expenditure. In the case before us, the assessee claims that no borrowed funds were utilized for the purpose of making investment and no interest was paid. Therefore, Rule 8D(2)(i) may not be applicable at all. Now coming to Rule 8D(ii), the assessee admittedly borrowed funds. Therefore, borrowed funds and its own funds got mixed up and it cannot be identified from which funds the investment was made. It also cannot be identified whether the expenditure incurred by the assessee for payment of interest is attributable to taxable income or for non-taxable income. Therefore, this Tribunal is of the considered opinion that Rule 8D(ii) is squarely applicable to the present case. Now coming to Rule 8D(2)(iii), the average investment made during the year under consideration, as
per the balance sheet has to be taken into consideration and 0.5% of the investment which resulted income and does not form part of total income, has to be taken into consideration. Since these facts were not taken into consideration by the CIT(Appeals), this Tribunal is of the considered opinion that the matter needs to be reconsidered by the Assessing Officer Accordingly, the orders of the authorities below are set aside and the issue of disallowance is remitted back to the file of the Assessing Officer. The Assessing Officer shall re-examine the matter in the light of the provisions of Rule 8D(2) of Income-tax Rules, 1962 and thereafter recomputed the disallowance.
With the above observation, the appeal of the Revenue is allowed for statistical purposes and the cross-objection of the assessee is dismissed.
Order pronounced on 23rd September, 2016 at Chennai.