ITAT decision: Interest income classification, section 14A disallowance, common expenses allocation.

The ITAT affirmed the assessment of interest income as 'Income from other sources' rather than 'Business' income, remanding the set-off of interest paid on the loan for further examination. The disallowance under section 14A was modified to align with a Bombay High Court ruling, directing a restriction to 2% of dividend income. The issue of allocating common expenses between STPI and non-STPI units was remanded for the assessee to provide a more suitable method.

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Issues:
1. Treatment of interest income of Rs. 23.94 lakhs.
2. Disallowance made under section 14A of the Act.
3. Apportionment of common expenditure between STPI and non STPI units.

Issue 1: Treatment of Interest Income
The assessee, engaged in IT services, received interest income of Rs. 23.94 lakhs from an inter-corporate loan given for purchasing an office premise. The Assessing Officer (AO) treated it as income from other sources, not business income. The assessee argued the interest income should be assessed under the head 'Business' as it was given in the ordinary course of business. The AO and Ld. CIT(A) disagreed, stating lending money was not part of the assessee's business activities. The ITAT agreed, concluding the interest income was rightly assessed as 'Income from other sources.' The alternative contention to set off interest paid on the loan was remanded to the AO for further examination.

Issue 2: Disallowance under Section 14A
The AO disallowed Rs. 5.70 lakhs under section 14A due to declared exempt dividend income of Rs. 2,03,820. The Ld. CIT(A) reduced it to Rs. 50,000, citing Rule 8D inapplicability for the year. The ITAT, following a Bombay High Court ruling, held that the disallowance should be based on a reasonable basis. As interest-free funds exceeded investments, no disallowance was required from interest expenditure. The ITAT directed the AO to restrict the disallowance to 2% of the dividend income, aligning with the High Court's decision.

Issue 3: Allocation of Common Expenses
The AO and Ld. CIT(A) disagreed with the assessee's method of apportioning common expenses between STPI and non-STPI units. The ITAT observed the lack of a scientific basis in the allocation criteria used by the assessee. While some allocations were reasonable, others, like electricity and foreign exchange fluctuation expenses, lacked scientific justification. The ITAT remanded the issue to the AO for fresh examination, directing the assessee to present a more suitable method of allocation.

In conclusion, the ITAT partially allowed the appeal, affirming the treatment of interest income, modifying the disallowance under section 14A, and remanding the allocation of common expenses issue for further review by the AO.

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