Commissioner of Income Tax-IV vs DEN Networks Limited

The Revenue is aggrieved by an order of the Income Tax Appellate Tribunal (ITAT) accepting the assessee''s plea with respect to the disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961.

In the given Assessment Year (AY) 2008-09, the assessee was engaged in an independent business and declared income against two heads reported as short terms capital gain of Rs. 1.18 crores and income from other sources to the tune of Rs. 31 lakhs. The total income was about Rs. 1.5 crores. The other claim of loss was in excess of that amount. The assessee''s return and books reveals accrual of tax income exemption of Rs. 25 lakhs. The Assessing Officer (AO) applied Rule 8D and directed an addition of Rs. 75 lakhs (or about 300% of its exemption income earned). CIT (Appeal) granted partial review and confirmed approximately 50% of the addition under Section 14A made by way of disallowance. On further appeal, the ITAT was significantly influenced by the fact that the assessee had not applied any borrowed fund towards the investment that yield exemption income. In these circumstances, it set aside the CIT appeal) ''s order.

Learned counsel for the Revenue contends that the ITAT''s approach is erroneous given the mandate of Rule 8D(2) (ii). It is urged that the assessment made by the CIT(A) after granting partial relief to the assessee was justified and has to be restored.

We have considered the submissions. The AO''s initially determined disallowance to the extent of Rs. 75,41,105/- as against the tax exemption income earned by the assessee of Rs. 25,77,300/-, was finally incorrect and excessive. It is based on misapplication of Rule 8D(2) (ii). The CIT(Appeal), to certain extent dealt with that misapplication but the fact remains that the tax exempt income of Rs. 25 lakhs was in effect brought to tax by disallowance of Rs. 37 lakhs. Moreover, the relevant component of the expenditure was on account of the interest paid by the assessee. The ITAT after examining the records has returned a clear finding that no interest element could be attributed to the earning of exempt income.

In these circumstances, the Court sees no reason to interfere with the ITAT''s order. No substantial question of law arises. The appeal is dismissed in the above terms.