2012 (10) TMI 857 - AT - Income Tax

Tribunal rules in favor of taxpayer on interest disallowance under Section 14A, restricts Rule 8D(2) disallowance.

The Tribunal held that disallowance of interest expenditure under Section 14A cannot be made if the amount is not claimed as an expense, resulting in the ... Disallowance u/s 14A r.w.r. 8D - interest paid to ICICI bank on purchase of shares and a further amount being ½% of average investment under Rule 8D(2) - Held that:- From the details of the expenditure it is clear that the expenditure incurred and claimed by the assessee has direct nexus with the professional income of the assessee but is not the case of the revenue that the assessee has used his official machinery and Establishment for earning the exempt income. AO has not pointed out that certain expenditure is not incurred for earning the professional income but are incurred in relation to dividend income or such expenditure is incurred for inseparable and indivisible activities comprising professional as well as the activities on which is exempt income has been earned by the assessee, then in the absence of any such instance of expenditure, finding of AO or any material to show that the expenditure incurred and claimed by the assessee against the taxable income has any relation for earning the exempt income, the provisions of section 14A cannot be applied. From the assessment order it is observed that the AO simply kept the assessee's submissions on record without appreciating as to whether these were correct or not. He proceeded on the premise as if the disallowance as per Rule D is automatic irrespective of the genuineness of the assessee's claim in respect of expenses incurred in relation to exempt income. It is an incorrect course adopted by the AO - as the disallowance cannot exceed the total actual expenditure incurred and claimed by the assessee the total expenditure claimed by the assessee in the Profit and Loss account is Rs.45,977/- thus the disallowance should be restricted to this amount - partly in favour of assessee. Issues:1. Disallowance of interest expenditure under Section 14A read with Rule 8D.2. Disallowance of a higher amount by applying Rule 8D(2) for audit fees, general expenses, and conveyance.Issue 1: Disallowance of interest expenditure under Section 14A read with Rule 8D:The appellant, a Private Limited Company, filed its return of income declaring a loss but had dividend income and bank interest. The Assessing Officer disallowed an amount under Section 14A read with Rule 8D on interest paid to ICICI bank. The First Appellate Authority upheld the decision. The appellant argued that disallowance cannot be made if the amount is not claimed as an expense. The Tribunal agreed, stating that an expense cannot be disallowed if not claimed. The Revenue should show the amount as a deduction first to disallow it under Section 14A, resulting in no addition. The Tribunal held that if the Revenue believes the interest expenditure was wrongly capitalized, it should be examined during capital gains/loss declaration. The disallowance was deleted.Issue 2: Disallowance of a higher amount under Rule 8D(2) for audit fees, general expenses, and conveyance:The appellant claimed total expenditure of Rs.45,977, but the Assessing Officer disclosed a higher amount for disallowance. The Tribunal cited a Mumbai Bench case emphasizing the need for a direct nexus between expenditure and income not forming part of total income. It was held that if no expenditure is incurred for earning exempt income, Section 14A does not apply. The Tribunal found the disallowance should not exceed the actual expenditure claimed by the appellant. Therefore, the disallowance was restricted to the amount claimed, and the appeal was allowed in part.