2016 (5) TMI 1533 - AT - Income Tax

Tribunal Upholds Disallowance of Expenditure Under Rule 8D for Assessee

Shri Arumugam Olaganathan Versus The Dy. Commissioner of Income-tax Circle I (1) Chennai

Shri Arumugam Olaganathan Versus The Dy. Commissioner of Income-tax Circle I (1) Chennai - TMI Issues: Disallowance of expenditure u/s 14AAnalysis:The appeal was against the order of the Commissioner of Income-tax (Appeals) for the assessment year 2010-11, focusing on the disallowance of expenditure under section 14A. The assessee argued that no expenditure was incurred for earning the exempted income of &8377;1,21,166, which was exempted u/s 10(35) of the Act. The Assessing Officer had applied the third limb of Rule 8D to disallow 0.5% of the average investment generating the exempted income. The assessee contended that section 14A is only applicable if actual expenditure was incurred for earning tax-free income, which was not the case here. On the other hand, the Departmental Representative argued that Rule 8D mandates disallowance of expenditure related to earning exempted income, and since the assessee earned tax-exempt income, the expenditure incurred for such income had to be computed as per Rule 8D. The Tribunal observed that the first and second limbs of Rule 8D were not applicable as there was no evidence of borrowed funds or interest expenditure not directly attributable to any income. However, the third limb, requiring 0.5% of the average value of investments yielding tax-exempt income to be considered for disallowance, was found applicable. The Tribunal upheld the decision of the Assessing Officer and Commissioner of Income-tax (Appeals), confirming the disallowance under Rule 8D for the assessee. Consequently, the appeal was dismissed, and the order was pronounced on 12th May 2016 in Chennai.