Disallowance under Section 14A of Income TAx Act, 1961
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Assessee-company is a dealer and trader in shares and securities. Its various business segments are: Futures & Options (F&O) in shares and securities, shares transactions in the cash and derivative markets, speculation business therein (the above classifications may bear some overlapping).
During the course of assessment proceedings, Assessing Officer noticed that Assessee has made investment in shares amounting to Rs. 95,45,400/-. Assessing Officer was of the view that the investment would generate exempt income and therefore provisions of section 14A becomes applicable.
Here in the present case, there is no linkage or nexus between the funds borrowed by assessee and the impugned investments, hence, no interest expenditure can be disallowed by mechanically applying the Provisions of Rule 8D of the Rules.
Some of the investments made by the assessee are short term. Since assessee is paying capital gains tax on short term investments, the provisions of Rule 8D will not apply on them. The Assessing Officer is directed to re¬compute dis-allowance u/s. 14A r.w.r. 8D after excluding short term investments.
The first issue in the appeal of the assessee relates to dis-allowance made u/s. 14A r.w.r. 8D. The Assessing Officer has made dis-allowance to the tune of Rs. 4,32,66,500/-. The contention of the assessee is that the assessee has earned dividend income of Rs. 4.6 Lakhs which is fully exempt u/s.
The assessee earned income by way of dividend. During the assessment u/s 143(3) of the Income Tax Act, 1961. The AO asked the assessee for the details of expenditure incurred for earning the exempted income (dividend income).
In combined result, one appeal of assessee in ITA No. 1800/Ahd/2008 is partly allowed for statistical purposes and the remaining six appeals of Revenue in the case of three assessees are dismissed and all 16 COs of the three assessees are also dismissed.
We find that the AO has made disallowance on the basis of Rule 8D of the Income Tax Rules, 1962, but no disallowance can be made or sustained in excess of the expenses debited in the profit & loss account.
Assessing 0fficer can invoke Rule 8D only when he records satisfaction in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. The condition precedent for the Assessing 0fficer entering upon a determination of the amount of the expenditure incurred in relation to exempt income
We find that with regard to the investment of Rs. 5907.18 lakhs in foreign subsidiaries, no disallowance can be made under section 14A because dividend income from foreign subsidiaries is taxable in India. Regarding balance investment of Rs. 38 crores approximately in Indian subsidiaries, we find that interest-free own funds of the assessee is many times more than this investment because interest free funds available with the assessee as on March 31, 2005 as per the balance-sheet as on that date is of Rs. 929.57 crores. There is no finding given by the Assessing Officer regarding any direct nexus between interest bearing borrowed funds and investment in Indian subsidiaries. Hence, in our considered opinion, no disallowance under section 14A can be made out of interest expenditure in the facts of the present case. Accordingly, ground Nos. 2 and 3 of the Revenue’s appeal are rejected.
