The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that no initiation of disallowances is required under Rule 8D(2)(i) if direct expenses are not debited to the profit and loss account of the business.
The assessee is engaged in the business of trading in textiles through her proprietary concern M/s. Lotus Fabrics. The assessee has also undertaken job works for the weaving of textiles in the looms and also makes investments in shares.
During the year under consideration, the assessee has received a dividend income of Rs. 8,46,531/- and long-term capital gains of Rs. 6,31,075/-. The assessee claimed both the above-said income as exempt but did not disallow any expenditure under Section 14A of the Income Tax Act.
The Assessing Officer disallowed a sum of Rs.12,59,952/- under rule 8D read with Section 14A of the Income Tax Act.
The Authorized Representative submitted that the assessee has maintained separate books of account for her business activities and for investment activities. All the direct expenses mentioned by the Assessing Officer have not been debited to the profit and loss account of the business concern.
It was further submitted that these expenses have been debited to the Capital account of the assessee in her personal books. Since the assessee has not claimed these expenses as a deduction anywhere, the Authorized Representative contended that there is no requirement of making any disallowance under rule 8D(2)(i) of the Rules.
The Two-bench member comprising of B.R. Baskaran (Accountant member) and Narendra Kumar Choudhury (Judicial member) held that there is merit in the submissions of the assessee and the assessee is having own capital at Rs.17.80 crores, while the investment made by the assessee stands at Rs. 4.65 crores.
Further, the assessee has maintained separate books of account for her business concern and we notice that the term loan taken by the assessee for business purposes has not been diverted to her investment/personal purposes.
Hence, there is no requirement of making any disallowance out of interest expenses under Section 8D(2)(ii) of the Rules. Since own funds exceed the value of investments, there is no requirement of making any disallowance out of interest expenses as per the decision rendered by the Jurisdictional High Court of Bombay in the case of HDFC Bank vs. DCIT.
Accordingly, the order passed by the Commissioner of Income Tax (Appeal) [CIT(A)] was set aside and the Assessing Officer was directed to delete the disallowance made under rule 8D(2)(ii) out of interest expenses.
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