Brief of the case:
The ITAT bench of Pune in the case of M/s Thermotech Engineering held that where the assessee has earned exempt income and incurred expenditure by way of interest which is not directly attributable to any particular income, the assessee is liable to fact the disallowance to be worked as per Rule 8D(2)(ii) unless it is established that investment in mutual funds were from independent sources on which no interest expenditure was incurred.
Facts of the case:
- The assessee firm was engaged in designing, manufacturing and supply of reactors, pressure vessels, agitators, tanks, etc. During the course of assessment proceedings, the Assessing Officer noted that the assessee had earned exempt income of Rs.24,18,535/- i.e. the dividend on mutual fund.
- The Assessing Officer also noted that in Form No.3CD of audit report in para 17(1), the assessee had declared NIL amount as amount inadmissible as a deduction in terms of section 14A of the Act.
- AO issued a questionnaire in which inter alia assessee was required to furnish the details of expenditure incurred for earning tax-free income and also to explain as to why disallowance should not be made under provisions of section 14A of the Act.
- Assessee in its reply stated that provisions of section 14A and Rule 8D of the Income Tax Rules, 1962 were not applicable, since there was no direct cost to earn exempt income.
- The Assessing Officer computed the disallowance under section 14A of the Act read along with Rule 8D of the Rules by taking the average of value of investment and average of total assets and also made the disallowance both under Rule 8D(ii) and 8D(iii) of the Rules. The Assessing Officer computed the disallowance under section 14A of the Act at Rs.11,40,553/-
- On appeal to CIT(A) he also agreed and upheld the disallowance made by AO and stated that the investment in mutual fund had been made from the common pool of funds available with the assessee both were interest bearing as well as interest-free. Therefore, the assessee’s claim that no interest bearing funds were utilized for investment in mutual funds was not accepted by the CIT(A).
- Aggrieved assessee is in appeal before ITAT.
Contention of the Assessee:
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