2017 (1) TMI 1707 - AT - Income Tax

Tribunal Upholds Disallowance Under Section 14A & Allows Deduction Under Section 57(iii)

Mukesh Navnitlal Mehta Versus Deputy Commissioner of Income-tax, 14 (2) (2), Mumbai

The Tribunal upheld the disallowance under section 14A of the Income Tax Act, 1961, based on the lack of a definite finding of expenditure related to ... Disallowance u/s 14A r.w.r 8D - Whether there are definite findings by the AO that the assessee has incurred expenditures which have bearing to the earning of exempt income after examining books of account of the assessee? - sustaining the addition u/s. 8D(2)(iii) - HELD THAT:- CIT (A) directed to compute the disallowance at the rate of 0.5% of the average investments excluding fixed deposits which in our opinion is correct findings as the addition made under rule 8D)(2)(ii) was deleted in total. So the only remaining issue of sustaining the addition u/s. 8D(2)(iii) is before us and the assessee has relied on a couple of decisions as discussed hereinafter praying for the additions as sustained under rule 8D(2)(iii). We find that the facts of the case in hand are totally distinguishable from the facts of decisions of Hon'ble High Courts relied upon by the assessee. In the case of HDFC Bank Ltd. [2014 (8) TMI 119 - BOMBAY HIGH COURT] and Max India Ltd. [2014 (8) TMI 119 - BOMBAY HIGH COURT] the decision was rendered in respect of applicability of rule 8D(ii) and not in the context of disallowance under rule 8D(2)(iii). In our opinion the findings given by the ld. CIT (A) are correct so far as the disallowance under section 14A read with rule 8D(2) is concerned and accordingly we uphold the same by dismissing the appeal of the assessee on this ground. Disallowance of deduction under section 57(iii) - assessee in order to claim credit facilities from the bank borrowed money from his HUF and put the same into FDRs which were pledged with the bank as security as the assessee was having FDRs in his HUF - HELD THAT:- Assessee transferred funds from HUF account to his individual account in order to make FDR which was pledged with the bank for obtaining credit facilities' at concessional rate. During the year the assessee received interest on FDR which were made out of the funds borrowed from HUF account. We also find that the assessee after showing the same as income under the head 'other sources' also claimed deduction of the equal amount under section 57(iii) as interest paid to HUF and shown in the return of income filed by the HUF which was proved from the return of income and computation of income, balance sheet and other annexure filed by the ld.AR during the course of hearing. It is trite law that same income cannot be subject to tax twice and therefore this be taxed only once either in the hands of the HUF or individual, but in the present case the income of the HUF has been assessed and accepted by the AO resulting into double taxation of the same income. In our considered opinion it would be fair, just and as per the provisions of the Act to allow the deduction u/s. 57(iii) as there is a direct nexus between money borrowed and put into FDR by the assessee which was pledged with the bank for obtaining the credit faculties In view of the above discussion, we are inclined to reverse the findings of the ld CIT (A) on this issue and direct the AO to delete the addition. Issues:1. Disallowance under section 14A of the Income Tax Act, 1961.2. Disallowance of deduction under section 57(iii) of the Act.Issue 1: Disallowance under section 14A of the Income Tax Act, 1961:The appeal challenged the order upholding the addition under section 14A without a definite finding of expenditure related to exempt income. The AO added an amount to the income based on investments in shares and mutual funds generating exempt income. The first appellate authority partially allowed relief based on the own funds being higher than investments. The appellant argued for the deletion of the addition citing relevant court decisions. The ld. CIT (A) upheld the disallowance under section 14A read with rule 8D(2)(iii) based on the Bombay High Court's decision. The Tribunal found the facts distinguishable from the cited cases and upheld the disallowance, dismissing the appeal on this ground.Issue 2: Disallowance of deduction under section 57(iii) of the Act:The dispute involved disallowance of a deduction claimed under section 57(iii) amounting to a specific sum. The AO disallowed the deduction due to lack of nexus between deposits and loans. The first appellate authority confirmed the disallowance, citing insufficient evidence of the deposit's purpose. The appellant argued against double taxation and presented evidence of funds transfer and FDR creation for obtaining credit facilities. The Tribunal observed a direct nexus between the borrowed funds and FDRs, leading to the allowance of the deduction under section 57(iii) to avoid double taxation. Consequently, the Tribunal partially allowed the appeal by directing the AO to delete the addition.In conclusion, the Tribunal's judgment addressed the issues of disallowance under section 14A and deduction under section 57(iii) comprehensively, considering legal precedents, factual evidence, and the application of relevant provisions of the Income Tax Act, 1961.