The Chennai bench of the Income Tax Appellate Tribunal held that AO will re-compute the disallowance only on the investments giving rise to exempt income and exclude the investments which does not give exempt income.
The issue in this appeal of assessee for the assessment year 2012-13 is as regards to the disallowance of expenses relatable to exempt income by invoking the provisions of section 14A read with rule 8D(2)(ii) & (iii) of the Income Tax Rules, 1962 by the AO and confirmed by the DRP.
The assessee company received dividend income of Rs.46,23,760/- and claimed the same as exempt under Section 10(34) of the Income Tax Act. The assessee suo-motto has disallowed a sum of Rs.1.07 lakhs i.e., expenses relatable to exempt income under section.14A of the Act. The AO not convinced by the disallowance made by the assessee suo-motto, he computed disallowance under the provisions of section 14A r.w.rule 8D(2)(ii) i.e., interest expenses at Rs.2,13,77,531/- and administrative expenses under rule 8D(2)(iii) being 0.5% of average value of investment at Rs.71,24,925/- and thereby computed the total disallowance at Rs.2,85,02,456/-
Aggrieved, assessee raised objection before DRP. The DRP confirmed the action of the AO but directed that only investment in foreign companies be excluded while computing the disallowance under Rule 8D(2)(iii). Aggrieved, the assessee appealed before the triibunal.
After hearing both the parties, the tribunal noted that only plea of the assessee is that the assessee has interest free funds available with it for making investment and for this, the assessee has filed the details i.e., the balance sheet and availability of funds and also extract of details of investment in its paper-book. The counsel for the assessee tried to show that interest free funds available are more than the investments giving rise to exempt income and the AO has nowhere proved the nexus between the interest bearing funds used for the purpose of investments giving rise to exempt income.
On this, the counsel stated that the issue can be re-examined by the AO viz-a-viz availability of interest free funds with that of the details of investment giving rise to exempt income. To this proposition, the CIT-DR had not objected.
The two member bench consisting of Shri Mahavir Singh (Vice President) and Manoj Kumar Aggarwal (Accountant member) directed the AO to verify the interest free funds available and the investments giving rise to exempt income. The assessee is to produce the books of accounts and the extract of details of investment before the AO.
In term of the above, this issue was remanded to the file of the AO. As regards to disallowance under Rule 8D(2)(iii) of the Income Tax Act i.e., 0.5% of average value of investment being administrative expenses, the AO will re-compute the disallowance only on the investments giving rise to exempt income and will exclude the investments which does not give exempt income. In term of the above, this also will be verified by the AO.
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