2014 (7) TMI 503 - AT - Income Tax

Tax Tribunal: Re-examine Funds-Investments Nexus under Income Tax Act for Disallowances

The Tribunal directed the Assessing Officer to re-examine the nexus between interest-free funds and investments, excluding interest costs if interest-free ... Disallowance u/s 14A r.w. Rule 8D of the Rules - Net worth of the company far exceeds its investments capable of yielding exempted income - Held that:- The AO has worked out the disallowance u/s 14A as per rule 8D after taking interest cost and administrative cost – assessee submitted that if any disallowance is called for, then it should be made on that basis only - the assessee’s networth and availability of funds is far more than investment which are capable of yielding exempt income and, therefore, no interest cost should be attributed for working out the disallowance - availability of interest free funds and investments which are capable of yielding exempt income, has not been examined properly either by the AO or by the CIT(A) – the decision in The Commissioner of Income Tax Versus Reliance Utilities & Power Ltd. [2009 (1) TMI 4 - HIGH COURT BOMBAY] – the AO is directed to re–examine the nexus of interest free funds and investment made – Decided partly in favour of Assessee. Issues:Challenge to impugned order dated 2nd August 2011 for assessment year 2008-09 under section 143(3) of the Income Tax Act, 1961. Grounds raised: 1. Disallowance under Section 14A read with Rule 8D. 2. Treatment of purchase and sale of shares as business activity. 3. Deletion of addition made under Section 14A read with Rule 8D.Analysis:1. The appellant, engaged in lending and financial services, showed various incomes including exempt dividend income. Disallowance under section 14A was calculated at Rs. 55,21,289. Assessing Officer applied rule 8D for reworking the disallowance based on investment nature.2. Assessee argued investments were stock-in-trade, not subject to disallowance under rule 8D. Assessing Officer disagreed, leading to confirmation by Commissioner (Appeals) of disallowance under section 14A as per rule 8D formula.3. Appellant contended that shares were held for trading and investment, thus no disallowance should apply to business income. Claimed net worth exceeded investment capable of yielding exempt income, hence no interest attribution for disallowance was justified.4. Tribunal considered appellant's arguments and cited the Bombay High Court case law supporting the appellant's position. Directed Assessing Officer to re-examine interest-free funds and investments nexus. Ordered exclusion of interest cost if interest-free funds exceeded investments, allowing only administrative cost disallowance.This judgment highlights the application of rule 8D for disallowance under section 14A, the distinction between investment and stock-in-trade, and the importance of assessing the nexus between interest-free funds and investments for determining disallowances. The Tribunal's decision provides clarity on interest attribution based on available funds and investments, emphasizing proper examination by tax authorities.