2015 (1) TMI 1239 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Held that - We are of the considered opinion that invocation of rule 8D without recording objective satisfaction by the Assessing Officer is not proper and we accordingly set aside the order of the ld. CIT(A) on this issue and delete the addition made in this regard. Moreover, the investment was made in the case of subsidiary companies, therefore, in those cases disallowance under section 1A(2) of the Act cannot be worked out unless and until it is established that certain expenditures are incurred by the assessee in these investments. - Decided in favour of assessee

Issues Involved:
1. Treatment of interest income on funds provided by the Government for a specific purpose.
2. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Treatment of Interest Income on Government Funds:

1.1. The appellant contended that the funds parked in Bank FOR were provided by the Government for a specific purpose and were to be utilized solely for that purpose. The appellant corporation acted merely as a trustee of these funds, and therefore, the interest income of Rs. 13,75,418/- on such funds should not be assessed as the income of the appellant corporation.

1.2. The appellant argued that the funds were made available by the Government of U.P. exclusively for disbursement to the employees of UPTRON India Limited under the Voluntary Retirement Scheme (VRS). The Government decided that the interest on such funds could not be appropriated by the appellant company towards its income. The CIT(A) erred in upholding the action of the Assessing Officer in treating the interest of Rs. 13,75,418/- as income of the appellant company.

1.3. The appellant further argued that the deposit account was seized/attached by the Provident Fund Commissioner, and the appellant company had no control over these funds. Therefore, the interest on such funds of Rs. 13,75,418/- should not be treated as income of the appellant company.

The Tribunal noted that the issue was covered by its order in the appellant's own case for assessment years 2005-06 and 2006-07, where the Tribunal had restored the issue to the file of the Assessing Officer with a direction to re-examine the issue afresh in light of the State Government's order dated 3.4.1980. The Tribunal found no justification to take a contrary view and accordingly set aside the order of the CIT(A) and restored the matter to the file of the Assessing Officer for re-adjudication in light of the State Government's order dated 3.4.1980.

2. Disallowance under Section 14A read with Rule 8D:

2.1. The appellant contended that the CIT(A) erred in confirming the addition made by the Assessing Officer under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.

2.2. The appellant argued that the Assessing Officer applied Rule 8D mechanically without application of mind and without regard to the facts and the appellant's reply. The appellant had determined an expenditure of Rs. 47,564/- for earning the exempt income and made a disallowance on its own. The Assessing Officer erroneously recorded that the appellant submitted no expenditure had been incurred on this account.

2.3. The appellant contended that the Assessing Officer failed to give any finding on the correctness of the expenditure claim made by the appellant. Therefore, the determination of expenditure as per sub-rule (2) of Rule 8D was beyond the jurisdiction of the Assessing Officer, and the CIT(A) erred in sustaining the addition made without jurisdiction.

2.4. The appellant argued that the CIT(A) had no warrant to state that the appellant had not provided any detail of expenditure directly incurred in earning the exempt dividend income, as no such expenses were incurred by the appellant. The Assessing Officer did not consider any direct expenditure in making the disallowance.

2.5. The appellant contended that the CIT(A) erred in concluding that once the direct expenses are not identifiable, then the indirect expenses are to be calculated as per Clause (iii) of Rule 8D(2).

2.6. The appellant argued that the CIT(A) had no warrant to hold that there was no anomaly in the computation of disallowable expenditure done by the Assessing Officer by applying Rule 8D(2)(iii).

The Tribunal noted that the Assessing Officer made an addition of Rs. 40,31,477/- under Section 14A read with Rule 8D, having noticed that the appellant had shown dividend income of Rs. 7,52,120/- exempt from tax. The Assessing Officer computed the corresponding expenditure as per Rule 8D(iii) at Rs. 40,31,477/- and made the addition.

The appellant preferred an appeal before the CIT(A), contending that the Assessing Officer had not recorded any finding regarding the correctness of the computation furnished by the appellant before invoking Rule 8D. The CIT(A) re-examined the claim but confirmed the disallowance.

The Tribunal found that the Assessing Officer had not recorded objective satisfaction with regard to the correctness of the appellant's claim before invoking Rule 8D. The Tribunal referred to various judicial pronouncements, including the judgment of the Hon'ble Bombay High Court in the case of Godrej And Boyce Mfg. Co. Ltd. vs. Dy. CIT & Another, which emphasized that the Assessing Officer must record objective satisfaction before applying the method prescribed by the rules. The Tribunal also noted that the investment was made in subsidiary companies, and there was no finding that any expenditure was incurred for earning exempt income.

The Tribunal concluded that the Assessing Officer had not recorded any objective satisfaction regarding the correctness of the appellant's claim. Therefore, the invocation of Rule 8D without recording objective satisfaction was not proper. The Tribunal set aside the order of the CIT(A) on this issue and deleted the addition made under Rule 8D.

Conclusion:

The appeal was partly allowed for statistical purposes, with the matter regarding the interest income on government funds being restored to the file of the Assessing Officer for re-adjudication, and the disallowance under Section 14A read with Rule 8D being deleted due to the lack of objective satisfaction by the Assessing Officer.

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