2018 (10) TMI 1773 - AT - Income Tax

Addition u/s 14A r.w.r.8D - HELD THAT - Disallowance made by invoking rule 8D(2)(iii) of the I.T.Rules is for administrative and common expenses when the assessee derives exempted income. In the instant case in each of the assessment year s huge investments are made which is given rise to exempted dividend income. Investment decisions are very complex and strategic and obviously they would have incurred administrative expenses such as salary wages general expenses stationary etc. Therefore it cannot be said no expenditure was incurred for making the said investments. Hence we confirm the disallowance made by the AO by invoking provisions of section 14A of the I.T.Act r.w. rules 8D(2)(iii) of the I.T.Rules. Disallowance of indirect interest expenditure by invoking the provisions of section 14A r.w. rules 8D(2)(ii) admittedly interest on borrowed funds used for business purposes cannot be computed for disallowance u/s 14A r.w. rule 8D(2)(ii) of the I.T.Rules. It is the duty of the assessee to prove that interest was incurred on borrowings are used for the specific business purpose and non-interest bearing funds were utilized for making investments which has given rise to exempted income. The assessee to prove that it is having its own funds to make investment which had yielded exempted income necessarily has to furnish the cash flow statement. The cash flow statement would disclose as on the date of making investments which had given rise to the exempted income that the assessee had interest free funds available with it. In the interest of justice and equity we deed it fit to remand the case to the Assessing Officer for fresh consideration

Summary

Issues:
- Whether the CIT(A) was justified in confirming part of the addition made u/s 14A of the I.T.Act r.w.r.8D of the I.T. Rules.

Analysis:
1. The judgment involves six appeals by the assessee and four appeals by the Revenue against the consolidated order of the Commissioner of Income-tax (Appeals) for the assessment years 2008-2009 to 2013-2014. The Revenue sought to withdraw its appeals, which were dismissed, leading to the adjudication of the assessee's appeal.

2. The common issue raised in the assessee's appeals was the justification of confirming part of the addition made u/s 14A of the I.T.Act r.w.r.8D of the I.T. Rules. The Assessing Officer disallowed expenditure invoking rule 8D(2)(ii) and rule 8D(2)(iii) of the I.T.Rules for the relevant assessment years.

3. The CIT(A) confirmed the disallowance made u/s 14A of the I.T.Act r.w. rule 8D(2) but restricted it to the exempted income earned during the assessment years. The assessee, aggrieved by this order, appealed before the Tribunal, arguing that interest-free funds were used for investments generating exempted income.

4. The Tribunal considered the disallowances made under rules 8D(2)(ii) and 8D(2)(iii) of the I.T.Rules. It confirmed the disallowance under rule 8D(2)(iii) for administrative and common expenses related to exempted income investments, emphasizing the complexity and strategic nature of investment decisions.

5. Regarding the disallowance of indirect interest expenditure under rule 8D(2)(ii), the Tribunal noted the assessee's claim of having interest-free funds but found it unsubstantiated. It directed a remand to the Assessing Officer for further examination, requiring the assessee to provide a cash flow statement to prove the availability of interest-free funds for investments yielding exempted income.

6. Ultimately, the Tribunal partly allowed the appeals filed by the assessee for statistical purposes and dismissed the Revenue's appeals as withdrawn. The case was remanded to the Assessing Officer for fresh consideration based on the directions provided in the judgment.