MUMBAI, DEC 24, 2012: THE issue before the Bench is - Whether when the assessee makes investments in mutual fund from which income is tax exempt, whether assessee earns any dividend or not, expenses incurred for investments are to be disallowed u/s 14A. And the answer goes in favour of the Revenue.

Facts of the case

The assessee had made investment of Rs.1,19,000/- in units of mutual fund from which income was exempt. The AO disallowed expenses relating to said income which was computed by him under provisions of Rule 8D at Rs.17,032/-. The CIT(A)held that expenses had to be disallowed as per Rule 8D.

The assessee was engaged in the business of syndication activities and was also enjoying income from insurance business. The assessee claimed deduction of interest expenditure of Rs.59,51,911/-. The AO held that syndication activities were of the nature of liaison activity resulting into commission income. The AO disallowed the entire interest. The CIT(A) confirmed the disallowance.

On Appeal before the Tribunal the AR submitted that the assessee had not received any dividend income which was exempt from tax and, therefore, no expenses could be disallowed u/s 14A. The AR also argued that even if disallowance had to be made, Rule 8D could not be applied as the same was applicable from A.Y 2008-09.

Having heard the parties, the Tribunal held that,

++ the decision of High Court / Supreme Court can be considered as a precedent only if it decides the question of law;

++ the assessee had made investment in the units of mutual fund income from which if received was exempt from tax. Therefore, whether any income has been earned or not expenses incurred in relation to the said investment which is not going to result into any taxable income has to be disallowed u/s 14A;

++ expenses have to be considered for disallowance u/s 14A. However, the authorities below have followed Rule 8D which is applicable only from A.Y 2008-09;

++ the order of CIT(A) set aside and the issue restore to the AO for passing a fresh order after necessary examination in the light of judgment of High Court of Bombay in Godrej and Boyce Mfg. Co;

++ on the issue of disallowance of interest expenditure, in the immediate preceding year, assessee had the same activities and interest on borrowings of Rs.3.70crores had been allowed by the AO which means that AO accepted the nexus of borrowings with the business activities. Therefore, in the current year, no disallowance of expenses can be made in relation to opening balance of Rs.3.70 crores. The disallowance can only be made in relation to interest free advances given by the assessee. The disallowance has to be made only in relation to such interest free advances @ 14.5% as done in earlier year. The AO will compute the disallowance accordingly.

(See 2012-TIOL-775-ITAT-MUM)