CIT vs. Catholic Syrian Bank Ltd (Kerala High Court)

No s. 14A Disallowance of administrative expenses pre Rule 8D

For pre AY 2008-09 the assessee earned tax free income from investment in units, shares, bonds etc. The assessee did not maintain separate books of account for the tax-free securities but claimed that the same had been invested from its own funds and no part of the interest on the borrowed funds could be disallowed. The AO took the view that the interest paid by the assessee on its borrowings together with the admin expenses had to be disallowed u/s 14A. On appeal, the Tribunal held {probably following Dhanlakshmi Bank 12 SOT 625 (Coch)} that as no rules had then been prescribed for computing the disallowance, no disallowance u/s 14A could be made. On appeal by the department, HELD partly allowing the appeal:

(i) Though Rule 8D inserted w.e.f. FY 2007-08 provides the precise formula for working out the disallowance to be made u/s 14A where the assessee does not have separate account showing the expenditure (by way of interest) incurred on tax-free investments, for periods prior thereto the expenditure can be estimated on a reasonable basis;

(ii) As regards the method of computing the disallowance of interest, the AO’s assumption that the investment in tax-free securities has come out of borrowed funds is not justified given the assessee’s case that they had non-borrowed funds to invest. Formula for computing interest disallowance suggested and matter remanded to AO for re-consideration;

(iii) As regards the disallowance of administrative expenditure, considering the fact that there is no precise formula for proportionate disallowance, no disallowance is called for, for proportionate administrative cost attributable to earning of tax free income until Rule 8D came into force.