2021 (1) TMI 92 - AT - Income Tax

Tribunal Limits Interest Expenses, Upholds Disallowance of Expenses under Rule 8D(2)(iii)

M/s. Mint Properties Pvt. Ltd. Versus The Income Tax Officer, Corporate Ward-4 (1) Chennai.

M/s. Mint Properties Pvt. Ltd. Versus The Income Tax Officer, Corporate Ward-4 (1) Chennai. - TMI Issues Involved:Disallowance under section 14A of the Income Tax Act for assessment year 2015-16.Analysis:The appellant contested the disallowance of Rs. 16,23,470 made under section 14A of the Act. The appellant argued that the interest paid of Rs. 10,76,939 was not attributable to investments in firms exempt from tax under section 10(2A) and should not be disallowed under Rule 8D(2)(ii). The appellant claimed a direct nexus between borrowals and advances/loans given, stating that the interest paid should be adjusted against interest received and offered for tax. The appellant asserted that no borrowed funds were invested in the firms and that the borrowed funds were used for loans to others, not for investments. The Assessing Officer also disallowed Rs. 7,66,662 under Rule 8D(2)(iii).The Assessing Officer computed the disallowance under section 14A in accordance with Rule 8D, adding back Rs. 16,23,470 to the total income. The Assessing Officer applied Rule 8D(2)(ii) towards interest expenditure and Rule 8D(2)(iii) towards other expenses. The CIT(A) upheld the additions made by the Assessing Officer, citing judicial precedents, including the decision of the Supreme Court in a specific case.The appellant argued that no disallowance should be made towards interest expenditure as it was borrowed for business purposes, and only net interest expenditure should be considered. The appellant contended that no specific expenditure had a direct nexus to exempt income, therefore no disallowance should be made under Rule 8D(2)(iii). The Departmental Representative supported the CIT(A)'s order, stating that disallowances under section 14A should be computed in accordance with Rule 8D.The Tribunal held that disallowance under section 14A was applicable to exempt income like share of profit from a partnership firm. Regarding interest expenditure, the Tribunal directed the Assessing Officer to delete the additions made under Rule 8D(2)(ii) as the interest paid was less than interest earned. However, the Tribunal upheld the disallowance of other expenses under Rule 8D(2)(iii) @ 0.5% of the average value of investments, as there was no separate method for allocation of common expenditure.In conclusion, the appeal was partly allowed, with the Tribunal directing the deletion of interest expenses additions but upholding the disallowance of other expenses under Rule 8D(2)(iii) of the IT Rules, 1962.