KOLKATA, MAR 12, 2013: THE issue before the Bench is - Whether when assessee fails to maintain separate accounts for taxable and non-taxable income, no wrong can be found with the CIT invoking revisionary powers to disallow interest expenditure incurred on account of non-taxable income. And the verdict goes in favour of Revenue.

Facts of the case

Assessee earned a sum of Rs.2,85,08,419/- on account of dividend which was not taxable. The assessee earned interest amounting to a sum of Rs.2,68,75,491/-. The assessee paid interest amounting to a sum of Rs.4,49,02,775/-. No expenditure with respect to the non-taxable income was shown. Out of the interest paid by the assessee, a sum of Rs.1,33,51,132/- was shown as interest paid towards the non-taxable income. On this basis, a total loss was computed at a sum of Rs.85,93,770/- which was accepted by the Assessment Officer. The C.I.T. in exercise of power under Section 263 directed the Assessment Officer to pass a fresh order in accordance with law and to make appropriate disallowance under Section 14A of the Income Tax Act. Tribunal reversed the order of the CIT(A).

On appeal before the High Court, the senior Counsel appearing on behalf of the assessee submitted that the method of determining the amount of expenditure in relation to income not includible in the total income introduced with effect from 24th March, 2008 was not there in the rules at the time when the order under challenge was passed by the Tribunal. Nonetheless, the method indicated in Rule 8D, introduced on 24th March, 2008, had been followed in this case. It was not, therefore, possible to say that the Revenue suffered any prejudice. The order of remand passed by the C.I.T. was merely on the basis of a change of opinion and, therefore, this Court should refrain from interfering with the order under challenge.

Having heard the parties, the HC held that,

++ the Assessment Officer in its order dated 28th January, 2005 did not make provision for disallowance of expenditure in terms of Section 14A of the I.T. Act. The assessee has paid interest of Rs.4,49,02,775/- out of which only a sum of Rs.1,33,51,132/- was shown to be relatable to the non-taxable income. The assessee did not maintain any separate accounts for the purpose of the exempt income. The assessee did not give one to one co-relation between the funds available and the funds deployed.

++ it was, therefore, not possible to follow with any amount of certainty as to the part or portion of the sum of Rs.4,49,02,775/- paid on account of interest relatable to the exempt income. The assessee has admittedly earned interest amounting to a sum of Rs.2,68,75,491/-. The said sum could not have been set off against the sum of Rs.4,49,02,775/- because the sum of Rs.2,68,75,491/- earned on account of interest is clearly taxable. The interest paid by the assessee amounting to Rs.4,49,02,775/- is both on account of taxable income and the exempt income. It was for the assessee to furnish the actual amount of interest paid for the purpose of earning the dividend income which the asessee did not do. The assessee, as such, did not discharge its burden and, therefore, the assessee could not have claimed that only a sum of Rs.1,33,51,132/- was relatable to interest paid for the purpose of earning the exempt income. There was, as such, reason enough to hold that the assessment was erroneous and was also prejudicial to the interest of the Revenue.

++ the learned Tribunal did not realize the facts and circumstances correctly. The requirement of the provision of Section 14A of the I. T. Act, 1961 has not been satisfied. The interference by the C.I.T. was based on facts and not any change of opinion.

(See 2013-TIOL-188-HC-KOL-IT)