Tribunal orders reassessment of interest expense disallowance under Section 14A

The Tribunal directed the Assessing Officer to re-compute the disallowance of interest expense under Section 14A using the Rule 8D formula, considering the working provided by the assessee. The appeal was allowed for statistical purposes, and the matter was restored back to the AO for a fresh assessment in accordance with the law.

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Issues Involved:
1. Disallowance of interest expense under Section 14A of the Income Tax Act.
2. Application of Rule 8D for computing disallowance.

Detailed Analysis:

1. Disallowance of Interest Expense under Section 14A:

The appeal concerns the disallowance of Rs. 12,02,094 out of total interest expense of Rs. 20,59,791 by the Assessing Officer (AO) on the grounds that the expense was incurred for earning exempt income, specifically the share in profit from various partnership firms. The assessee argued that the interest expense was directly related to taxable income earned from interest on capital invested in the firms and should not be disallowed. The AO, however, issued a show-cause notice and proceeded with the disallowance under Section 14A read with Rule 8D, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

2. Application of Rule 8D for Computing Disallowance:

The assessee contended that the AO did not follow the formula prescribed under Rule 8D while making the disallowance. The disallowance was made proportionately at 58.36% of the total interest expense. The assessee provided a detailed computation of interest received and paid, showing a direct nexus between the borrowed funds and the capital invested in the firms. The assessee also made a suo motu disallowance of Rs. 2,50,212 under Section 14A, which the AO did not reject but did not apply the Rule 8D formula either.

Tribunal's Findings:

The Tribunal noted that the AO identified the issue of disallowance under Section 14A correctly but did not follow the prescribed formula under Rule 8D. The AO made a proportionate disallowance instead of computing it as per Rule 8D. The Tribunal directed the AO to re-compute the disallowance under Section 14A read with Rule 8D, considering the working provided by the assessee.

Conclusion:

The Tribunal restored the matter back to the AO to re-compute the disallowance under Section 14A using the Rule 8D formula. The AO is directed to consider the assessee's working and pass the order in accordance with the law. The appeal is allowed for statistical purposes.

Order Pronouncement:

The order was pronounced in the open court on 18/11/2021 by placing the result on the Notice Board.

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