2016 (5) TMI 462 - AT - Income Tax

Disallowance under section 14A - AO has computed the disallowance under section % on the average investment as on the opening balance and closing balance of investments of the relevant period - Held that - As observed by the learned CIT(A) while interest expenditure has been incurred on funds invested in the capital of firms from where the assessee has received both taxable income in the form of interest income and remuneration the assessee would have also incurred certain other expenses like brokerage bank charges vehicle expenses depreciation thereon etc. for earning such exempt income and therefore some disallowance would be called for under section 14A of the Act though not as exactly laid out by the AO. In the factual matrix of the matter as discussed above we deem it reasonable to restrict the disallowance under Rule 8D(2)(iii) on an adhoc basis - Decided partly in favour of assessee

Summary

Issues involved:
- Validity of assessment order under section 143(3) r.w.s. 153A of the I.T. Act
- Disallowance under section 14A of the I.T. Act
- Computation of House Property income

Validity of Assessment Order:
The appeals were against the orders of CIT(A)-1 for assessment years 2008-09 to 2010-11. The appeals raised issues regarding the validity of the assessment orders passed under section 143(3) r.w.s. 153A of the I.T. Act. The appellant contended that the assessment orders were invalid and bad in law. However, it was noted that only specific grounds were being pressed in the appeals, leading to the dismissal of other grounds not being pressed.

Disallowance under Section 14A of the I.T. Act:
The main issue revolved around the disallowance under section 14A of the Act for the three assessment years. The appellant, a partner in firms deriving exempt share of profit under section 10(2A), argued that interest paid on borrowed funds was allowable as deduction against interest income and remuneration, both considered as business income under section 28(v) of the Act. The AO computed disallowance under Rule 8D for the three years based on the view that borrowed funds' nexus with taxable or non-taxable income was difficult to establish. The CIT(A) upheld disallowance under Rule 8D(2)(iii) but reduced/disallowed disallowance under Rule 8D(2)(ii) for the relevant years.

Detailed Analysis - Disallowance under Section 14A:
The CIT(A) held that interest paid on borrowed funds invested in firms was related to interest income and not to the exempt share of profits. Consequently, the disallowance was reduced/deleted for certain years. The Tribunal further analyzed the issue and held that interest on borrowed capital for investment in firms should be allowed against remuneration received, leading to the deletion of disallowance for a specific year. The Tribunal partly allowed the appeal concerning disallowance under section 14A for all three assessment years, modifying the disallowance amounts made by the AO and CIT(A).

Computation of House Property Income:
The issue of computing House Property income at a specific amount was also raised for all three assessment years. However, this issue was not pressed by the appellant and was consequently dismissed as infructuous.

In conclusion, the ITAT Mumbai partially allowed the appeals for the assessment years 2008-09 to 2010-11, focusing on the validity of assessment orders and the disallowance under section 14A of the I.T. Act. The Tribunal modified the disallowance amounts made by the authorities, emphasizing the nexus between borrowed funds, investment income, and business income.