Tribunal Reduces Disallowance Under Section 14A

The Tribunal allowed the appeal on the limited aspect of disallowance under section 14A of the Income Tax Act. It found that the assessee had sufficient own funds for investments, with no borrowed funds used, and directed the AO to reconsider the disallowance calculation under Rule 8D(2)(iii) only for investments generating exempt income. The Tribunal upheld the grounds raised by the assessee and reduced the disallowance previously made, ultimately ruling in favor of the assessee on the issue of disallowance under section 14A.

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Issues:
Adjudication of disallowance u/s 14A of the Income Tax Act.

Analysis:
The appeal was re-examined for the limited purpose of adjudicating the disallowance made by the AO under section 14A of the Act. The assessee earned dividend income claimed as exempt u/s 10(34) of the Act. The AO invoked Rule 8D for disallowance, which was confirmed by the ld CITA. The assessee contended that no direct expenditure was incurred in earning the dividend income as it was received in the bank directly. The AO disallowed expenses under three heads: direct expenses, interest expenses, and administrative expenses. The assessee challenged the disallowance on various grounds.

The Tribunal found that the assessee had sufficient own funds for making investments, with no borrowed funds utilized. Previous tribunal decisions and High Court rulings supported this finding. The Tribunal emphasized that all investments were made out of the assessee's own funds, and there was no nexus between borrowed funds and investments generating exempt income. The Tribunal cited the case of Pr.CIT vs Rasoi Ltd, where disallowance under section 14A was deleted due to lack of borrowed fund utilization for investments.

Regarding disallowance under Rule 8D(2)(iii), the Tribunal directed the AO to consider only investments yielding exempt income for the disallowance calculation, following precedent set by previous tribunal decisions. The Tribunal instructed the AO to recompute the disallowance under Rule 8D(2)(iii) while reducing the disallowance already made by the assessee in the return of income.

Ultimately, the Tribunal allowed the grounds raised by the assessee for statistical purposes and allowed the appeal on the limited aspect of disallowance u/s 14A of the Act for statistical purposes. The order was pronounced on 02.05.2018 by the Tribunal.

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