2018 (6) TMI 1601 - AT - Income Tax

Tribunal limits disallowance under Section 14A, rules in favor of assessee

The Tribunal ruled in favor of the assessee in an appeal regarding disallowance under Section 14A of the Income Tax Act. The Tribunal found the high ... Disallowance u/s. 14A - HELD THAT:- AO also has not established that assessee has diverted the borrowed funds for the purpose of investments and unnecessarily invoked Rule 8D(2), which only applies to certain interest payments where the use of funds could not be established for the purpose of business. If there is any diversion of funds borrowed for the purpose of business, the provisions of Section 36(1)(iii) will directly apply wherein the disallowance is 100% and not proportionate, as provided in Rule 8D(2). Since no nexus is established, the disallowance per se under Rule 8D(2) does not apply. Moreover, similar issue was considered in assessee’s own case by the Coordinate Bench in the AY. 2011-12, wherein the Tribunal has confirmed the order of CIT(A), in restricting the disallowance to the amount claimed as exempt, following the principles laid down by the various Hon'ble High Courts. We modify the order of CIT(A) and direct the AO to restrict the disallowance to the amount of dividend earned and claimed as exemption. - Appeal of assessee is partly allowed. Issues:Appeal on disallowance u/s. 14A of the Income Tax Act.Analysis:The case involved an appeal by the assessee regarding the disallowance made under Section 14A of the Income Tax Act by the Assessing Officer (AO) and confirmed by the Ld. Commissioner of Income Tax (Appeals)-5, Hyderabad. The assessee, a company engaged in trading commercial vehicles, disclosed income of Rs. 12,37,14,570. The AO invoked Section 14A due to investments of Rs. 53.20 Crores and proposed a disallowance under Rule 8D. The assessee argued that investments were from own funds, not borrowed, and were for business purposes, not tax-free income. However, the AO, without proving a link between investments and borrowed funds, disallowed interest under Rule 8D(2)(ii) and another amount under Rule 8D(2)(iii), totaling Rs. 3,35,37,722. The Ld.CIT(A) upheld this decision after detailed discussion.The Ld.AR contended that as the assessee earned only Rs. 30,148 as dividend, the disallowance should be limited to exempt income. They cited a Co-ordinate Bench decision in the assessee's case for AY. 2011-12. The Ld.DR supported the AO and CIT(A)'s orders. The Tribunal noted that in AY. 2011-12, the Ld.CIT(A) provided relief, but in the present case, confirmed the disallowance. Considering the minimal dividend earned by the assessee, the Tribunal found the high disallowance unjustified. It was emphasized that the AO failed to prove diversion of borrowed funds for investments, invoking Rule 8D(2) inappropriately. The Tribunal highlighted that if funds were diverted, Section 36(1)(iii) would apply with a 100% disallowance, not proportionate as per Rule 8D(2). Referring to the AY. 2011-12 decision, the Tribunal directed restricting the disallowance to the amount of dividend claimed as exempt, aligning with High Court principles.The Tribunal referenced decisions by various courts and ITATs to support its stance. It noted the Hon'ble Delhi High Court's ruling that disallowance u/s 14A cannot exceed the exempt income earned. Following this, the Tribunal dismissed the Revenue's appeal and modified the CIT(A)'s order to restrict disallowance to the dividend earned and claimed as exempt. Consequently, the appeal of the assessee was partly allowed, with the order pronounced on 15th June 2018.