2018 (3) TMI 207 - AT - Income Tax

Tribunal Upholds CIT(A) Decision on Expense Disallowance, Emphasizes Net Interest Consideration (A)

The Tribunal upheld the CIT(A)'s decision to delete the disallowance of expenses under section 14A applying Rule 8D for Assessment Year 2009-10. The ... Addition u/s 14A - ‘net’ interest expenditure - Held that:- The interest expense incurred in the business of money lending was ₹ 2,0276,317/-. In the course of its business of financing, the assessee borrows and lends monies. The assessee pays interest on the borrowed funds and earns interest on the loans advanced. Therefore, both the interest income and the interest payment are intrinsically linked. There is complete inter lacing of funds and therefore, for ascertaining the tax effect, netting off of interest paid with interest received is necessary. It is for this reason that the net interest is reflected in the profit and loss account. AO should also have considered the interest on net basis. After setting off interest expense against the interest income, the assessee was let with negative figure of ₹ 6,08,163/- which had been suo moto disallowed by the assessee in its entirety. Thus the ‘net’ interest expenditure is to be considered for the purposes of disallowance u/s 14A and where after setting off interest earned against the interest expenditure no further interest expense remains then disallowance cannot be made u/s 14A of the Income-tax Act, 1961. - Decided in favour of assessee Issues:Appeal against order pertaining to Assessment Year 2009-10; Disallowance of expenses under section 14A applying Rule 8D.Analysis:1. The Revenue appealed against the order of the ld Commissioner of Income Tax (Appeals)-2, Kolkata, challenging the disallowance of expenses under section 14A applying Rule 8D for Assessment Year 2009-10. The dispute arose from the computation of expenses disallowable for earning dividend income, where the Assessing Officer calculated a disallowance of &8377; 1,33,24,914/-.2. The ld CIT(A) deleted the addition made by the Assessing Officer after considering the submissions of the assessee. The assessee, engaged in loan financing, had paid interest on loans obtained and received interest on loans advanced during the year. The assessee had also earned dividend income. The assessee suo moto disallowed expenses under Rule 8D, but the Assessing Officer mechanically invoked Rule 8D, disregarding the assessee's submissions and the netting off of interest expenses with interest income.3. The ld CIT(A) held that only net interest expenditure should be considered for disallowances under section 14A. Referring to a previous Tribunal judgment, the ld CIT(A) concluded that the expenses should be restricted to the extent claimed for deduction. Therefore, no further disallowances were warranted, and the addition of &8377; 1,33,24,914/- was deleted.4. The Revenue, dissatisfied with the CIT(A) order, appealed further. However, the Tribunal upheld the CIT(A) decision. The Tribunal noted the interconnection of interest income and expenses in the business of money lending, emphasizing the need to consider net interest. Following a previous judgment, the Tribunal confirmed that no further interest disallowance should be made beyond the net interest expenditure.5. Consequently, the Tribunal dismissed the Revenue's appeal, affirming the order passed by the ld CIT(A) and emphasizing the importance of considering net interest expenditure in such cases.