INCOME TAX ACT, 1961

Section 14A

Disallowance under section 14A - Expenditure against exempt income - Assessee borrowing funds at interest and investing these funds in debentures, bonds, loans, etc., wherein taxable interest income was received - Computation of disallowance

Assessee-NBFC earned tax free dividend income on investments in shares and made suo-moto disallowance of Rs. 4,59,998 under section 14A read with rule 8D2(iii) by computing disallowance @ 0.5% of average investments. AO worked out disallowance of interest expenditure under rule 8D(2)(iii). Assessee challenged this on the ground of non-reording of satisfaction by AO in terms of section 14A(2). Held: The assessee being NBFC was borrowing funds at interest and investing these funds in Debentures, Bonds, Loans, etc., wherein taxable interest income was received. And in such scenario, only net interest expenditure had to be considered for the purposes of disallowance of the interest expenditure under section 14A read with rule 8D(2)(ii). For the purpose of disallowance under section 14A read with rule 8D(2)(iii) only those investments which had actually yielded tax free income had to be considered.

REFERRED : Reliance Utilities and Power Limited, CIT v. HDFC Bank Limited (2014) 366 ITR 505 (Bom.) : 2014 TaxPub(DT) 3351 (Bom-HC) and Jt. Investments Private Limited v. CIT (2015) 372 ITR 694 (Del.) : 2015 TaxPub(DT) 1375 (Del-HC)

FAVOUR : Matter remanded.

A.Y. : 2012-13

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