INCOME TAX ACT, 1961

Section 14A

Disallowance under section 14A - Disallowance under rule 8D(2)(ii) towards interest expenditure and disallowance under rule 8D(2)(iii) @ 0.5% of average value of investments - Validity of -

Assessee earned exempt income being share of profit from partnership firm, whereas not disallowed expenditure incurred in relation to income which do not form part of total income. AO called upon assessee to explain as to why disallowances contemplated under section 14A shall not be made in accordance with rule 8D of the IT Rules, 1962. In response, the assessee submitted that the assessee had not incurred any expenditure in relation to exempt income and further share of profit from partnership firm cannot be equated with dividend income which is exempt under section 10(34) to make disallowance of expenditure in relation to such income. However, AO computed disallowance under rule 8D(2)(ii) towards interest expenditure and made further disallowance under rule 8D(2)(iii) @ 0.5% of average value of investments. Held: It is well-settled principle of law that for the purpose of applying clause (ii) of rule 8D prior to its amendment, amount of expenditure by way of interest would be interest paid by assessee on borrowings less taxable interest earned during the financial year. In this case, interest paid is less than interest earned for the year. Therefore, AO was directed to delete the additions made towards interest expenses under rule 8D(2)(ii). As regards disallowance of other expenses under rule 8D(2)(iii) @ 0.5% of average value of investments, there is no scope for AO to go for ad-hoc disallowance when assessee has not maintained separate books of account for investments activity and business. AO had applied method provided under rule 8D(2) (iii) @ 0.5% of average value of investments to compute disallowance of other expenses. Therefore, rejected the grounds taken by the assessee in respect of disallowance of other expenses under rule 8D(2)(iii) of IT Rules, 1962.

REFERRED : Godrej & Boyce Manufacturing Company Ltd. v. Dy. CIT & Anr. Civil Appeal No.7020/2011 : 2017 TaxPub(DT) 968 (SC)Pr. CIT v. Nirma Credit & Capital Pvt. Ltd. T.C.A. No.409 & 514 of 2017 vide order dt. 31-8-2017 : 2017 TaxPub(DT) 4021 (Guj-HC),

FAVOUR : Partly In assessee's favour.

A.Y. : 2015-16

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