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2016 (11) TMI 1062 - AT - Income TaxDisallowance u/s 14A - AY 2011-12 - Held that:- The expenditure factually incurred on non-taxable receipt is to be disallowed. The expenditure assumes, presumes or deemed to be incurred on nontaxable income cannot be allowed. There should be a proximate cause for disallowance, which has relationship with the exempt income. The return of investment or huge investment cannot be a proximate cause. The assessee specifically pleaded during the assessment that they have earned non-taxable income by way of dividend on the mutual funds. The assessee has invested the excess loans funds. The assessee has suo-moto disallowed the interest expenditure of ₹ 7,03,118/-. The AO merely hold that the working of the disallowance is not as per Rule 8D, and the same was upheld by Ld. CIT(A). With the above observation, we hold that the disallowance u/s 14A should be restricted to Rs. ₹ 7,03,118/- plus ₹ 65000/- on account of administrative expenses as per Rule 8D2(iii). For AY 2012-13 assessee has surplus interest free fund of ₹ 10.10 crore and made investment of ₹ 5.56 crore during the year. On specific queries, the AR of the assessee submitted that the assessee has incurred corresponding interest expenditure of ₹ 1,95,668/-. We have further seen that the fact of this appeal are at little variance to the earlier year. In the earlier year, the assessee voluntarily made the disallowance of ₹ 7,03,118/-, however, in the year under consideration, no voluntary disallowance was made. It has come on record that assessee earned dividend income on units of mutual fund. The assessee invested the borrowed fund for the investment in the mutual fund in earlier years, thus, the assessee must incurred interest on the borrowed fund. On our specific queries, the assessee submitted the corresponding interest expenditure incurred for earning the exempt income and the such interest is worked out at ₹ 1,96,668/-. Accordingly, the AO is directed to restrict the disallowance u/s 14A of the Act at ₹ 1,95,668/- plus administrative expanses of ₹ 1,70,000/- under rule 8D2(iii).
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