2012 (4) TMI 125 - HC - Income Tax

Court remits Section 14A disallowance for re-examination by AO, following Maxopp Investment Ltd. principles.

The court remitted the matter to the Assessing Officer (AO) for re-examination of the disallowance under Section 14A of the Income Tax Act, without ... Disallowance u/s 14A - Assessing Officer, while making disallowance under Section 14A, had observed as under: “In the computation of income assessee has shown a dividend income of Rs.1,12,89,548/- and claimed the same as exempt u/s 10(33) of I.T. Act - The reply of the assessee has been considered and as per provisions of sec. 14A as mentioned above, the expense relatable to earning of exempt income are not allowable - CIT(Appeals), as observed above, held that the investment with reference to the applicability of section 14A should be taken as Rs.13,57,50,000/- and not as Rs.18,57,50,000/- after inter alia holding that the investment of Rs.5,00,00,000/- in bonds of ICICI Bank had not resulted in tax-free income - It is clear from the observations made by the Assessing Officer, in the assessment order, that his intention was to segregate and compute the disallowance to be made of expenses under Section 14A - Held that: the disallowance, if any, to be made by the Assessing Officer will not exceed the disallowance which was made in the original assessment order as reduced by the CIT(Appeals) - Decided in favor of the assessee by way of remand to AO Issues Involved:1. Applicability of Section 14A of the Income Tax Act, 1961.2. Justification of the Income Tax Appellate Tribunal in deleting the disallowance under Section 14A.Issue-wise Detailed Analysis:1. Applicability of Section 14A of the Income Tax Act, 1961The primary issue under consideration was whether the Income Tax Appellate Tribunal (ITAT) was justified in deleting the disallowance made under Section 14A of the Income Tax Act, 1961. The assessee, a company, had made various investments in equity shares, preference shares, and bonds. The interest earned on bonds issued by ICICI Bank was taxable, thus Section 14A was not applicable to these bonds. The court focused on the investments in equity shares and mutual funds.The tribunal found that the borrowed funds were not utilized for the purchase of the equity shares and mutual funds. The Assessing Officer (AO), however, had made a disallowance based on the assumption that the assessee had not segregated or provided evidence to show that the investments were not made out of borrowed funds. The AO allocated interest expenses proportionately between exempt income and other income, leading to a disallowance of Rs. 45,05,724.2. Justification of the Income Tax Appellate Tribunal in Deleting the Disallowance under Section 14AThe ITAT deleted the disallowance, leading to the Revenue's appeal. The court referred to the case of Maxopp Investment Ltd. vs. Commissioner of Income Tax, which emphasized that the AO must first reject the claim of the assessee regarding the expenditure incurred in relation to income not forming part of the total income, and such rejection must be for cogent reasons. The AO must then determine the amount of expenditure on a reasonable and acceptable method of apportionment.The court noted that the AO was handicapped due to the failure of the assessee to furnish relevant details and particulars. The AO's intention was to segregate and compute the disallowance of expenses under Section 14A. The court decided to remit the matter to the AO to examine the aspects and compute the disallowance if necessary, keeping in mind the directions in the Maxopp Investment Ltd. case. The court clarified that the AO would not go into the question of disallowance of interest and that the disallowance, if any, would not exceed the original disallowance as reduced by the CIT(Appeals).ConclusionThe court concluded by remitting the matter to the AO for re-examination of the disallowance under Section 14A, without expressing an opinion on whether any disallowance must be made. The AO was directed to follow the principles laid down in the Maxopp Investment Ltd. case and ensure that the disallowance, if any, does not exceed the original amount as reduced by the CIT(Appeals). No costs were awarded.