2014 (1) TMI 1622 - AT - Income Tax

Disallowance of expenses section 14A read with rule 8D(2) - Exemption on income from dividend long-term capital gains on equity shares and equity oriented funds - Held that - expenses incurred at Abu Road, where the manufacturing facilities of the assessee were located, were directly related to marble and granite manufacturing activities of the assessee. However no investment activities were carried out therefrom. As these expenses were not at all related to investment activities of the assessee, they are outside the purview of section 14A - salary of ₹ 1,50,000 paid to the accountant can be termed as indirectly related to exempted income. Other administrative expenses consisted of director's remuneration, paid to Shri Rakesh Agarwal and Shri Rajesh Agarwal who were looking after local sales of marble and granites. Therefore, salary paid to the directors were related to marble and granite manufacturing activities. Motor car expenses incurred by the assessee were directly related to marble and granite manufacturing activities. Out of the telephone expenses of ₹ 3,46,117, ₹ 20,051 related to telephone expenses of Shri Rajesh Agarwal, which could be termed as indirectly related to the exempted income. The assessee has also incurred expenditure on payment of rent relating to director's residence and godown for storing marble and granites. In the assessee's case, all the expenses debited to its profit and loss account have been analysed threadbare - we modify the orders of the lower authorities and direct the Assessing Officer to restrict disallowance under section 14A - Decided partly in favour of assessee.

Summary

Issues involved:
Disallowance of expenses under section 14A read with rule 8D(2) of the Income-tax Act for assessment year 2008-09.

Analysis:
The appeal before the Appellate Tribunal ITAT Mumbai was filed by the assessee against the order of the Commissioner of Income-tax (Appeals) related to the disallowance of expenses under section 14A read with rule 8D(2) of the Income-tax Act for the assessment year 2008-09. The Assessing Officer had disallowed expenses amounting to Rs. 10,40,025, citing that management expenses were incurred in relation to exempt income. The provisions of section 14A state that any expenditure incurred in relation to exempt income shall not be allowed as a deduction. Rule 8D provides the method for computing such expenditure when the Assessing Officer is not satisfied with the correctness of the assessee's claim regarding expenses related to exempted income. The High Court of Delhi in a relevant case emphasized that the Assessing Officer must indicate reasons for rejecting the claim of the assessee regarding expenditure related to exempt income.

The assessee, primarily engaged in manufacturing and trading of marble and granite slabs and tiles, earned exempt income from shares and mutual funds. Upon analysis, it was found that most expenses, except security transaction tax, were related to manufacturing and trading activities and not to the exempt income earned during the year. Expenses incurred at the manufacturing facilities were directly related to manufacturing activities and not investment activities. Selling and distribution expenses at the Mumbai office were related to sales of marble and granite, not investment activities. Employee remuneration and administrative expenses were also found to be related to manufacturing activities. The Tribunal categorized expenses as directly related to exempted income, directly related to taxable income, and related to both. After detailed consideration, the disallowance under section 14A was recalculated to be Rs. 4,36,416, and the Assessing Officer was directed to restrict the disallowance to this extent.

In conclusion, the Appellate Tribunal allowed the appeal in part, modifying the orders of the lower authorities and directing the Assessing Officer to limit the disallowance under section 14A to Rs. 4,36,416. The judgment was pronounced on January 22, 2014.