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Report by Shreya Gupta

In any circumstances, the interest expense cannot be denied u/s14A r.w. Rule 8D(2)(ii) of the IT Act. The disallowance made by adopting Rule 8D is not only opposed to the statutory requirement, but also to the legal principles established.


The case is an appeal by the petitioner against the order passed by the Income Tax Appellate Tribunal in which the court allowed the respondent’s appeal. The respondent filed a return for the income of Rs.358,47,29,328/- under normal provisions and book profit of Rs.431,48,93,079/- under section (u/s) 115JB of the I.T. Act. The AO made various disallowances u/s.14A r.w. Rule 8D amount to Rs.5,11,85,000/-. The AO investigated u/s 143(2) of the I.T. Act 1961. The case then went to The Ld. CIT (A) which allowed the respondent’s appeal but then the case went to the Hon’ble ITAT which again ruled in favor of the respondent. 


The petitioner contended on the previous orders by the courts given against his favor and asked if they were correct. He contended that “the assessment order that setting-off interest costs of dividend income against other taxable income areagainst the matching concept of income and expenditure. He submitted that there was no need to rely on any presumption of own funds on account of the changed law that came into force from 2007-08 followed by the introduction of rule 8D in 2008- 09 which provides for a method of calculations. It is submitted that because of the above, the ITAT erred in endorsing the CIT(A)’s order which drew the presumption of its interest-free funds. He further submitted that the ITAT ought not to have deleted the addition of interest disallowed by the AO, in the absence of any evidence that indicated that borrowed funds were not used to make investments that yielded exemption. He further submitted that the ITAT ought not to have been considered interest while calculating disallowance u/s. 14A read with Rule 5D since the assessee had not maintained a separate account for the investment related to exempt income.” 


The respondent took the court through previous orders and stated that they were correct u/s. 14A read with Rule 8D (2)(ii) and prayed that the appeal deserves to be dismissed. In justification to his arguments, he took the help of the previous cases Godrej & Boyce Manufacturing Co. Ltd. Vs. Deputy Commissioner of Income-Tax and Another and South Indian Bank Ltd. vs. Commissioner of Income-tax. 


The court stated that “To put it another way, in respect of payment made out of the mixed fund, it is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it may not be permissible for the Revenue to estimate a proportionate figure.” The court stated that the AO has not recorded that there was any inadmissible expenditure u/s 14A. He stated that there are no powers u/s 14(2) which allow AO to apply Rule 8D straightaway without considering the correctness of the assessee’s claim in respect of expenditure incurred concerning the exempt income. The court further stated that the interest expenditure cannot be disallowed u/s14A r.w. Rule 8D(2)(ii) under any circumstances and therefore dismissed the appeal.


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