Tribunal upholds CIT(A) order on interest expenditure disallowance under Section 14A

M/s Kishore Muralidhar Agarwal, Secunderabad Versus Income-tax Officer, Ward – 10 (4), Hyderabad.

M/s Kishore Muralidhar Agarwal, Secunderabad Versus Income-tax Officer, Ward – 10 (4), Hyderabad. - TMI Issues Involved:
1. Delay in filing the appeal.
2. Disallowance under Section 14A of the Income Tax Act.
3. Proportionate allocation of interest expenditure.

Detailed Analysis:

1. Delay in Filing the Appeal:
The appeal in ITA No. 753/Hyd/16 was filed with a delay of 190 days. The assessee submitted an affidavit stating that the delay was due to illness and advised bed rest for four months. The tribunal found sufficient reason for the delay and condoned it, admitting the appeal for hearing and adjudication.

2. Disallowance under Section 14A:
The assessee's income included house property, salary, business income from a partnership firm, and other sources such as dividends. The assessee claimed a loss on account of interest paid amounting to Rs. 12,93,947/-. The AO noticed that the borrowed funds were used for investing in shares, which generated exempt dividend income. Consequently, the AO invoked Section 14A and applied Rule 8D, disallowing Rs. 12,32,966/-.

The CIT(A) observed that the assessee had both interest-bearing and non-interest-bearing funds, which were mixed. The CIT(A) concluded that a proportionate amount of interest expenditure related to exempt income should be disallowed. The ratio of interest-free funds to interest-bearing funds was 22:78. Therefore, 78% of the interest expenditure was disallowed under Section 14A.

3. Proportionate Allocation of Interest Expenditure:
Before the tribunal, the assessee argued that the borrowed funds were used to lend to Pancharatna Metal Processing Ltd., where the assessee was a director. The interest income from such lending was offered for tax, and the interest expenditure should be allowed as a deduction. However, the tribunal found that the balance sheet showed significant investments in shares, indicating that borrowed funds were used for investment purposes.

The tribunal upheld the CIT(A)'s decision, noting that the assessee had mixed funds and the majority of borrowed funds were used for investments that did not generate taxable income. The tribunal agreed with the proportionate disallowance of interest expenditure, sustaining 78% of the disallowance and allowing 22% as it related to the assessee's own funds.

Conclusion:
The tribunal dismissed the appeals, upholding the CIT(A)'s order to disallow 78% of the interest expenditure under Section 14A, proportionate to the borrowed funds used for investments generating exempt income. The decision was pronounced in the open court on 10th July 2019.