AO directed to limit disallowance u/s 14A (of Income Tax Act, 1961) to amount of tax free income earned

1. Aarti Steels Ltd was into manufacturing of iron & steel products and oxygen gas & generation of power.

2. AO noted that assessee had shown investment of Rs.1.42 crore and Rs 2.29 crore as on 31.3.2008 and 31.3.2009 respectively, which were not part of total income.

3. Assessee had claimed interest of Rs.35 crores.

4. AO invoked s 14A and Rule 8D (of Income Tax Rules, 1962), and made a disallowance of Rs.12 lakhs.

5. AO noted that the assessee had invested Rs 48.9 lakhs in purchase of land, and asked assessee to provide the proof of land having been put to use.

6. AO held that interest paid for the period the asset was not being put to use was required to be capitalized.

7. AO capitalized the interest expenditure in proportion to the interest on investment in land @8% and capitalized an amount of Rs 44,825.

8. CIT(A) directed AO to compute disallowance of interest on day-to-day basis by applying of debt equity ratio.

On appeal, the ITAT held as under:

9. We direct the Assessing Officer to limit the disallowance made under section 14A (of Income Tax Act, 1961) read with Rule 8D (of Income Tax Rules, 1962) to the amount of tax free income earned by the assessee.

10. On availability of mixed funds, it cannot be presumed by the Revenue that the borrowed funds have been used for the purposes of acquisition of said land.

11. We find that the observations made by the I.T.A.T., Chandigarh Bench are applicable to the facts and circumstances of the present case also. Respectfully following the order of the Coordinate Bench, we direct the Assessing Officer todelete the addition made by him.

Case Reference - Aarti Steels Limited, Vs. The D.C.I.T.

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH

BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER

AND MS. RANO JAIN, ACCOUNTANT MEMBER

ITA No.268/Chd/2015

(Assessment Year : 2009-10)