2013 (11) TMI 1633 - AT - Income Tax

Disallowance under section 14A - Held that - The objective satisfaction of the AO as to the correctness of the assessee s claim was not recorded in the instant case. However, even if Rule 8D cannot be applied, the AO is obliged to ascertain the expenditure which had been incurred to earn the tax-free income. He must adopt a reasonable basis consistent with the relevant facts and circumstances of the case. The appellant s dividend income during the year is ₹ 3,33,320/- and appellant estimated an expenditure of 2% of dividend income as related to exempt income and disallowed an amount of ₹ 6,666/- in the computation of total income. The expenditure estimated by the appellant appears to be highly inadequate. Appellant has to incur various direct and indirect expenses in as much as the efforts of the employees go in tracking the mutual fund and other investments, purchase and sale of mutual funds and other assets, deposit of the dividend warrants, portfolio management etc. Considering the facts and circumstances of the case and judicial precedents discussed in preceding paras, a sum of ₹ 50,000/- is considered as reasonable expenditure to earn the exempt income. Accordingly, the disallowance is restricted to ₹ 50,000/-. This ground is partly allowed

Summary

Issues:
- Disallowance under section 14A of the Act

Analysis:
The appeal was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2009-10, specifically concerning the disallowance under section 14A of the Act. The Assessing Officer disallowed a substantial amount invoking the provisions of section 14A read with Rule 8D. The assessee contended that no fresh investment was made during the year, and the dividend income was received from an unlisted company based on investments made in 2003-04. The interest expenditure incurred was argued not to be related to earning exempt income. The Commissioner of Income Tax (Appeals) restricted the disallowance to a nominal amount of &8377; 50,000, leading to the Revenue's appeal.

The Departmental Representative supported the Assessing Officer's order, while the counsel for the assessee relied on a decision of a co-ordinate Bench of the Tribunal to argue against the disallowance. The Tribunal examined the submissions and the orders of the lower authorities. The Commissioner of Income Tax (Appeals) extensively discussed the circumstances under which disallowance under section 14A read with Rule 8D could be made. The Tribunal noted that the Assessing Officer must record satisfaction regarding the correctness of the claim before invoking Rule 8D, emphasizing the necessity of establishing a direct nexus between the expenditure and exempt income.

Citing relevant case law, including decisions of the Mumbai Tribunal and the Punjab & Haryana High Court, the Tribunal highlighted the requirement for the Assessing Officer to determine the correctness of the claim before applying Rule 8D. The Tribunal emphasized that the AO must objectively satisfy himself based on the accounts of the assessee before making any disallowance. In this case, the Tribunal found that the objective satisfaction of the AO was not recorded, but even without Rule 8D, the AO should ascertain the expenditure incurred to earn tax-free income reasonably. Considering all factors, the Tribunal upheld the Commissioner of Income Tax (Appeals)'s decision to restrict the disallowance to &8377; 50,000.

After carefully reviewing the order of the Commissioner of Income Tax (Appeals), the Tribunal found no reason to interfere with the decision. Consequently, the appeal of the Revenue was dismissed, and the order was pronounced in open court.