2015 (10) TMI 2709 - AT - Income Tax

Tribunal affirms Rule 8D for disallowance calculation under Income Tax Act, stresses nexus between investments & exempt income.

The Tribunal upheld the First Appellate Authority's decision to consider net interest for computing disallowance under section 14A of the Income Tax Act, ... Disallowance u/s. 14A r.w. Rule 8D - computation of deduction - allowance of interest on net or gross amount - Held that:- FAA had rightly held that while making disallowance u/s.14A of the Act,the AO should have considered only net interest. See Maxopp Investment Ltd. [2011 (11) TMI 267 - Delhi High Court ]. Effective ground of appeal is decided against revenue Issues:1. Disallowance of interest expenditure under section 14A r.w.r 8D.2. Calculation of disallowance based on net interest.3. Nexus between investment in securities and exempt income.4. Applicability of Rule 8D for disallowance.Analysis:1. The Assessing Officer (AO) disallowed an amount under section 14A of the Income Tax Act, 1961. The First Appellate Authority (FAA) confirmed the addition, leading the assessee to appeal before the Tribunal. The Tribunal set aside the issue for fresh adjudication by the AO. The AO calculated the disallowance under section 14A read with Rule 8D, despite the assessee's submission of net interest basis calculation. The FAA upheld the disallowance, emphasizing the need for establishing a nexus between investments and exempt income.2. The assessee argued that the AO erred in not considering net interest and misapplied Rule 8D by using current assets instead of total assets for disallowance calculation. The FAA, however, held that the disallowance was rightly made by the AO but directed the AO to consider net interest debited to the Profit and Loss account for computing disallowance under section 14A. The Tribunal upheld this decision, citing the judgment in the case of Maxopp Investment Ltd. regarding the apportionment of interest.3. The FAA observed that the assessee failed to establish a direct nexus between the capital invested in securities and exempt income, leading to the disallowance under section 14A. The Tribunal concurred with this finding and emphasized the importance of considering only net interest for disallowance calculation, as per the principles outlined in the Maxopp Investment Ltd. case.4. The Tribunal dismissed the appeal filed by the AO, affirming the FAA's decision to consider net interest for computing disallowance under section 14A of the Income Tax Act, 1961. The judgment highlighted the significance of correctly apportioning interest expenditure related to exempt income, as per the provisions of Rule 8D.