2017 (12) TMI 360 - AT - Income Tax

Revenue's Appeal Dismissed for Disallowance Nexus; CIT(A)'s Decision Set Aside for Recalculation

DCIT, Circle 8 (1), New Delhi Versus M/s SIL Investment Ltd. And Vice-Versa

The Revenue's appeal against the deletion of disallowance under Rule 8D(2)(ii) was dismissed as the Tribunal found no nexus between interest-bearing ... Addition u/s 14A r.w.r.8D - Held that:- For assessment year 2010-11 this Tribunal in assessee’s own case has set aside the issue to the assessing officer to compute the disallowance under rule 8D (2) (iii) at the rate of 0.5% of investments which actually have resulted in the exempt dividend income and rather than 0.5% of the average total investment. Following the rule of consistency we are also inclined to set aside this issue back to the file of Ld. AO for recomputing the disallowance under rule 8D (2) (iii) for the year under consideration with a similar direction to consider 0.5% of the investments which actually have resulted in the exempt dividend income. Issues Involved:1. Deletion of disallowance made by AO under Rule 8D(2)(ii) read with Section 14A of the I.T. Act, 1961.2. Confirmation of disallowance out of administrative expenses under Rule 8D(2)(iii) of the I.T. Rules, 1962.3. Levy of interest under Sections 234B and 234D of the I.T. Act.Detailed Analysis:Issue 1: Deletion of Disallowance under Rule 8D(2)(ii) read with Section 14AThe Revenue appealed against the CIT(A)'s deletion of the disallowance amounting to Rs. 4,87,35,014/- made by the AO under Rule 8D(2)(ii) read with Section 14A of the I.T. Act, 1961. The AO was dissatisfied with the assessee's method of calculating disallowance and attributed the entire interest expenses to tax-free dividend income. The CIT(A) found that the assessee established a clear nexus of interest expenses with its main financing activity, showing that no interest-bearing borrowings were related to investments yielding tax-free dividend income. This was consistent with findings in previous assessment years (2006-07, 2009-10, and 2010-11). The Tribunal upheld the CIT(A)'s decision, stating that the AO failed to establish any nexus between interest-bearing borrowings and tax-free income investments. Thus, the appeal by the Revenue was dismissed.Issue 2: Confirmation of Disallowance under Rule 8D(2)(iii)The assessee contested the CIT(A)'s confirmation of disallowance amounting to Rs. 61,73,967/- under Rule 8D(2)(iii). The assessee argued that the disallowance should be restricted to 0.5% of investments that actually resulted in dividend income. The Tribunal referred to its decision in the assessee's case for the assessment year 2010-11, where it directed the AO to compute disallowance at 0.5% of investments yielding exempt income. Following the rule of consistency, the Tribunal set aside this issue back to the AO to recompute the disallowance accordingly. Therefore, Ground No. 1 of the cross-objection was allowed for statistical purposes.Issue 3: Levy of Interest under Sections 234B and 234DThe assessee also raised objections regarding the levy of interest under Sections 234B and 234D. However, no specific arguments were advanced on these points. The Tribunal noted that these grounds were consequential in nature and did not require adjudication at this stage. Thus, Ground No. 2 was not addressed substantively.Conclusion:- The appeal by the Revenue was dismissed.- The cross-objection by the assessee was partly allowed, with directions to the AO to recompute the disallowance under Rule 8D(2)(iii) based on investments that actually resulted in exempt income.- Issues related to the levy of interest under Sections 234B and 234D were not adjudicated as they were consequential.