Tribunal directs deletion of disallowed amount under section 14A

The Tribunal partially allowed the appeal, directing the deletion of a portion of the disallowed amount under section 14A read with rule 8D. The Tribunal found that the investments were primarily made from own funds, with a minimal amount from borrowed funds, and were strategic in nature, not for earning dividend income. Consequently, the disallowance confirmed by the ld. CIT(A) was deemed erroneous, leading to the deletion of a portion of the disallowed amount by the AO.

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Issues:
Challenge to disallowance of expenses under section 14A read with rule 8D.

Analysis:
The appeal was filed by the assessee against the order of the ld. CIT(A) for the assessment year 2011-12, specifically challenging the disallowance of Rs. 40,43,307/- under section 14A read with rule 8D. The AO invoked section 14A r.w.r.8D due to the assessee's tax-free income of Rs. 60,13,150/-, despite the assessee's claim that the disallowance was not applicable. The AO disallowed Rs. 40,43,307/-, comprising expenditure under rule 8D(2) and 8D(2)(iii), leading to a revised total income assessment. The ld. CIT(A) dismissed the appeal, citing precedents emphasizing the deeming provision of section 14A for presumptive disallowance, even if no expenditure is claimed for exempt income. The circular by CBDT clarified that expenses would be disallowed under section 14A regardless of corresponding exempt income. The appellate order referenced various judicial pronouncements supporting the disallowance under section 14A.

The assessee contended that the disallowance under section 14A r.w. 8D was incorrect, as no investments were made from interest-bearing funds. The investments were detailed in the balance sheet, showing strategic investments for gaining control over a subsidiary, not for earning dividend income. The ld. AR argued that loans were used for specific purposes, not for purchasing shares, and presented a revised working of disallowance, seeking deletion of a portion of the disallowed amount.

Upon review, it was observed that the investments were primarily made from own funds, with a minimal amount from borrowed funds, and the investments in the group company were strategic in nature. The Tribunal found merit in the arguments presented by the ld. AR and concluded that the disallowance confirmed by the ld. CIT(A) was erroneous. Consequently, the Tribunal set aside the CIT(A)'s order and directed the AO to delete a portion of the disallowed amount, partially allowing the appeal.

In conclusion, the Tribunal partially allowed the appeal, directing the deletion of a portion of the disallowed amount under section 14A read with rule 8D, based on the assessment of the source of funds for investments and the strategic nature of the investments made by the assessee.

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