2017 (2) TMI 738 - AT - Income Tax

Disallowance u/s 14A - Held that - We observe that assessee had earned exempt dividend income of Rs. 65.33 lacs and also paid interest of Rs. 15.52 lacs on borrowed funds and assessee s investment as on 31.03.2007 stood at Rs. 9.52 crores as against Rs. 10.38 crores as on 31.3.2006. Further amended Rule 8-D with respect to disallowance u/s 14A of the Act came in effect from Asst. Year 2008-09 whereas in this appeal we are dealing with Asst. Year 2007-08. We find force in the arguments of the ld. AR that ld. CIT(A) has failed to appreciate the fact that the assessee has already offered income as taxable income and hence ld. Assessing Officer erred in invoking provisions of section 14A of the Act since corresponding income has already been offered to tax. As regards balance disallowance of Rs. 97, 314/- i.e. (Rs.5, 76, 925 Rs. 4, 79, 611) we find that assessee s investment as on 31.03.2007 stands at Rs. 9.52 crores whereas interest free funds which included share capital and reserves stood at Rs. 38.42 crores as on 31.3.2007 which means that assessee s interest free funds is almost 4 times the investment made. CIT vs. Torrent Power Ltd. (2014 (6) TMI 185 - GUJARAT HIGH COURT) has held that if the assessee has sufficient interest free funds to cover up the investment then no disallowance of interest expenses is called for.As in the present case out of the total disallowance of Rs. 5, 76, 925/- PMS charges of Rs. 4, 79, 611/- has already been disallowed by adding it back to the business income and as far as remaining amount of Rs. 97, 314/- is concerned we find that assessee is having sufficient interest free funds to cover up the investments and in this case no disallowance on interest expenses is called for. We accordingly delete the disallowance u/s 14A and allow the appeal of assessee.

Summary

Issues:
- Disallowance under section 14A of the Act without proving nexus between expenditure and exempt income earned
- Time-barred appeal due to delay in filing
- Disallowance of Portfolio Management Charges
- Applicability of Rule 8D with respect to disallowance under section 14A
- Disallowance of interest expenses

Analysis:

1. Disallowance under section 14A without proving nexus:
- The assessee challenged the disallowance of Rs. 5,76,925 under section 14A of the Act, arguing that there was no proven nexus between the expenditure incurred and the exempt income earned.
- The Assessing Officer disallowed the amount based on investments in tax-free securities and interest paid on borrowed funds.
- The CIT(A) upheld the disallowance, stating that the expenditure attributable to earning tax-free income must be determined reasonably, not as per Rule 8D for AY 2007-08.
- The Tribunal observed that the assessee had already offered income from portfolio management as taxable business income, and hence, no further disallowance was warranted. The disallowance under section 14A was deleted.

2. Time-barred appeal due to delay:
- The appeal was found to be time-barred by 8 days due to the accountant's oversight in passing on the assessment to the Chartered Accountant for filing the appeal.
- The Tribunal condoned the delay, considering it a mistake of the accountant, and proceeded to adjudicate the appeal.

3. Disallowance of Portfolio Management Charges:
- The CIT(A) confirmed the disallowance of Portfolio Management Charges amounting to Rs. 4,79,611, forming part of the total disallowance under section 14A.
- The Tribunal noted that the charges were disallowable under section 14A, and the disallowance was upheld based on the discussions and facts presented.

4. Applicability of Rule 8D for disallowance under section 14A:
- The Tribunal emphasized that Rule 8D was not applicable for AY 2007-08 and considered the specific circumstances of the case in determining the disallowance under section 14A.

5. Disallowance of interest expenses:
- The Tribunal analyzed the balance disallowance of Rs. 97,314 after considering the disallowed Portfolio Management Charges.
- It was observed that the assessee had sufficient interest-free funds to cover the investments, following the precedent set by the Jurisdictional High Court.
- Consequently, the disallowance of Rs. 5,76,925 under section 14A was deleted, and the appeal of the assessee was allowed.

This detailed analysis covers the various issues raised in the appeal before the Tribunal, providing insights into the reasoning behind the decisions made regarding the disallowances and the time-barred nature of the appeal.