2013 (12) TMI 7 - AT - Income Tax

Tribunal limits disallowance under section 14A to Rs. 11,59,234 for AY 2007-08

The Tribunal upheld the CIT(A)'s decision to restrict the disallowance under section 14A to Rs. 11,59,234 for AY 2007-08. The Tribunal dismissed the ... Interest Expense - Disallowance u/s 14A - Held that:- The total interest paid was on account of interest on debentures and on unsecured loans taken – No interest has been incurred for amount of loan taken for the purposes of investment – Decided against assessee. Issues:- Disallowance under section 14A- Applicability of Rule 8D for AY 2007-08Analysis:1. Disallowance under section 14A:The dispute in this case revolves around the disallowance under section 14A of the Income Tax Act. The Assessing Officer (AO) computed a disallowance of Rs. 1,33,00,000/- based on the investments and dividend income of the assessee. The assessee contended that Rule 8D, which provides for the methodology of computing such disallowance, should not be applicable for the assessment year 2007-08. The Commissioner of Income Tax (Appeals) [CIT(A)] restricted the disallowance to Rs. 11,59,234/-, considering the submissions made by the assessee regarding the bifurcation of expenses.2. Applicability of Rule 8D for AY 2007-08:The primary contention of the assessee was that Rule 8D, which was introduced to determine the disallowance under section 14A, is not applicable for the assessment year 2007-08. The assessee argued that Rule 8D came into effect from assessment year 2008-09 onwards. The CIT(A) accepted this argument and limited the disallowance accordingly. The Tribunal upheld the CIT(A)'s decision, emphasizing that the expenses were properly bifurcated by the assessee, and there was no direct link between the expenses and the earning of tax-free income.In conclusion, the Tribunal dismissed the appeal filed by the department, affirming the CIT(A)'s order of restricting the disallowance under section 14A to Rs. 11,59,234/-. The Tribunal found the computation of disallowance to be reasonable based on the submissions and bifurcation of expenses provided by the assessee. The Tribunal also noted that there was no evident nexus between the expenses incurred and the tax-free income earned by the assessee. The decision highlighted the importance of correctly applying the provisions of Rule 8D and considering the specific facts and circumstances of each case while determining the disallowance under section 14A.