ITAT allows appeal, limits disallowance to 2% of exempt income, directs verification of interest rates. Penalty proceedings premature.

The ITAT partly allowed the appeal, directing the Assessing Officer to restrict the disallowance under section 14A to 2% of total exempt income and to verify the interest rate for excess interest paid to directors and shareholders at 13%. The initiation of penalty proceedings under section 271(1)(c) was deemed premature and not considered. The decision was pronounced on 28/04/2017.

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Issues:
1. Disallowance under section 14A of the Income Tax Act.
2. Disallowance of excess interest paid to directors and shareholders.
3. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Analysis:
1. Issue 1 - Disallowance under section 14A of the Income Tax Act:
The appellant contested the disallowance under section 14A, arguing that no administrative expenses were incurred for investments. The CIT(A) directed the Assessing Officer (A.O.) to follow the judgment of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. The ITAT held that Rule 8D is not retrospective and directed the A.O. to restrict the disallowance to 2% of the total exempt income, following the decision in CIT vs. M/s. Godrej Agrovet Ltd.

2. Issue 2 - Disallowance of excess interest paid to directors and shareholders:
The A.O. disallowed excess interest paid to directors and shareholders, adding it to the total income of the assessee. The CIT(A) upheld this disallowance. The appellant argued that the disallowance was unwarranted, presenting calculations to support their claim. The ITAT set aside the CIT(A)'s order and directed the A.O. to verify the interest rate calculated by the assessee at 13% and make a fresh assessment, following relevant legal precedents.

3. Issue 3 - Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act:
The penalty proceedings under section 271(1)(c) were initiated but not concluded. The ITAT deemed it premature to consider this ground of appeal.

In conclusion, the ITAT partly allowed the appeal, directing specific actions regarding the disallowances and penalty proceedings. The decision was pronounced on 28/04/2017.

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