2016 (1) TMI 1337 - AT - Income Tax

Tribunal allows appeal, modifies disallowance rules, considers own vs. borrowed funds for investments.

The Tribunal partially allowed the appeal, deleting the disallowance under Rule 8D(2)(ii) and directing a revised calculation for the disallowance under ... Disallowance u/s 14A r.w.r 8D - Held that:- In the case of CIT Vs Gujrat Power Corporation Ltd (2011 (3) TMI 1440 - Gujarat High Court) as held that the assessee had demonstrated that it had other sources of investments and no part of the borrowed could be stated to be used for the purpose of earning tax free income, the invocation of the provisions of section 14A for taxing such interest was not justified. Thus we respectfully following the ratio laid down, delete the addition of ₹ 5,49,368/- under rule 8D(2)(ii). As regards the balance addition of ₹ 4,21,973/- we find merit in the arguments of the ld AR that 0.5% of dividend yielding investments should be disallowed and not on the entire investments . We, therefore direct the AO to calculate the disallowance of 0.5% under rule 8D(2)(iii) by taking those investments which yielded dividend during the year. Thus, the appeal of the assessee is partly allowed. The AO is directed accordingly. - Decided in favour of assessee. Issues:Confirmation of disallowance u/s 14A r.w.r 8D of the Act of Rs. 11,18,976.Analysis:The appeal involved the confirmation of disallowance u/s 14A r.w.r 8D of the Act amounting to Rs. 11,18,976. The assessee had earned tax-free dividend income and did not allocate any expenses for earning such income. The Assessing Officer applied Rule 8D and made the disallowance. The CIT(A) upheld the disallowance, stating that expenses incurred for transactions yielding exempt income must be treated as expenditure for earning exempt income. The Special Bench judgment supported the Assessing Officer's decision. The assessee's argument of no expenditure being incurred for earning exempt income was rejected, and the disallowance was confirmed.The appellant challenged the disallowance, arguing that the interest paid for a loan borrowed for share trading should not be disallowed as it was exclusively used for business income. The appellant presented evidence showing investments were made from own funds and not borrowed funds. The Tribunal noted that the investments were made from the assessee's own funds, and the borrowed money was used for share trading, as evidenced by the closing stock of shares. Citing precedents, the Tribunal deleted the disallowance of Rs. 5,49,368 under Rule 8D(2)(ii) and directed the AO to calculate the disallowance of 0.5% under Rule 8D(2)(iii) based on investments yielding dividend during the year. Consequently, the appeal was partly allowed.In conclusion, the Tribunal partially allowed the appeal, deleting the disallowance under Rule 8D(2)(ii) and directing a revised calculation for the disallowance under Rule 8D(2)(iii). The Tribunal's decision was based on the assessee's use of own funds for investments and the specific nature of the borrowed funds for share trading, as supported by legal precedents.