2014 (9) TMI 511 - AT - Income Tax

Tribunal upholds CIT (A) decision: No disallowance under Section 14A for lack of nexus.

DCIT, Circle 3 (1), New Delhi Versus M/s. Cosmos International Ltd.

The tribunal dismissed the revenue's appeal, upholding the CIT (A)'s order that no disallowance under Section 14A was warranted as there was no nexus ... Disallowance u/s 14A r.w Rule 8D – Interest expenses – Held that:- CIT(A) was rightly of the view that the AO has erred in invoking rule 80 in the present case without establishing any nexus between the borrowed funds and the investment - the AY under consideration is 2009-10 wherein the Rule 8D is applicable - the AO has not determined the claim of the assessee regarding expenses whether there were any expenditure related to the earning of the exempted income - Rule 8D can be applied where the AO is not satisfied with the claim of the assessee that no expenditure has been incurred to earn the exempted income – the AO has not fulfilled the onus of recording the findings with regard to the expenditure incurred towards the income to be earned which is exempted from the tax – thus, the CIT (A) was justified in granting the relief to the assessee by holding that when there is no nexus between the borrowed fund and investment made then no disallowance needs to be made as no interest bearing fund utilized by the assessee for making the investment – the order of the CIT(A) is upheld – Decided against revenue. Issues Involved:1. Disallowance under Section 14A of the Income-tax Act, 1961.2. Applicability of Rule 8D of the Income-tax Rules.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income-tax Act, 1961:The assessee, a company, filed a return declaring an income of Rs. 1,36,18,360/-. The Assessing Officer (AO) made a disallowance of Rs. 19,59,692/- under Section 14A by applying Rule 8D, which is 0.5% of the average investment. The assessee appealed, and the CIT (A) granted relief by stating that the appellant company did not earn any exempt income or claim any expenditure for earning such income during the relevant assessment year. The investments of Rs. 2 crore were made in the previous assessment year (2008-09) from the company's own funds, and no new investments were made in the assessment year 2009-10. The AO did not contest the claim that no interest expenditure was incurred for these investments.The CIT (A) emphasized that Rule 8D is not automatically applicable and should be invoked only if the AO is not satisfied with the correctness of the claim regarding the expenditure related to exempt income. The AO must establish a nexus between the borrowed funds and the investments made. The CIT (A) referred to the case of CIT vs. Hero Cycle Ltd., where it was held that Section 14A cannot be invoked if no exempt income is claimed.2. Applicability of Rule 8D of the Income-tax Rules:The revenue appealed, arguing that the assessee incurred interest expenses without providing a bifurcation during the assessment proceedings. The AO applied Rule 8D, believing the assessee's claim of no expenditure incurred for earning exempt income was incorrect. The AO relied on the decision in Cheminvest Ltd. vs. ITO, where it was held that disallowance under Section 14A can be made even if no exempt income is earned or received by the assessee.The assessee countered by stating that they had their own funds exceeding Rs. 7.7 crores and had made no new investments during the year under consideration. The borrowed funds were used solely for business purposes, and no exempt income was earned. The CIT (A) correctly appreciated these facts and granted relief.The tribunal noted that the assessment year under consideration was 2009-10, where Rule 8D was applicable. The AO did not determine whether any expenditure was related to earning exempt income. Rule 8D can only be applied if the AO is not satisfied with the assessee's claim that no expenditure was incurred for earning exempt income. The AO failed to record findings regarding the expenditure incurred towards income exempt from tax.The tribunal upheld the CIT (A)'s order, stating that no disallowance should be made as there was no nexus between the borrowed funds and the investments made. The appeal of the revenue was dismissed.Conclusion:The tribunal dismissed the revenue's appeal, upholding the CIT (A)'s order that no disallowance under Section 14A was warranted as there was no nexus between the borrowed funds and the investments made by the assessee, and no exempt income was earned during the relevant assessment year.