2016 (2) TMI 996 - AT - Income Tax

Addition u/s 14A r.w.r.8D - Held that - When the Assessing Officer is not satisfied about the correctness of the claim of expenditure or the assessee s claim that no expenditure was incurred, then the Assessing Officer shall recompute the expenditure by applying the procedure laid down in Rule 8D(2). As per sub-Rule (2) of Rule 8D, the aggregate of the three limbs provided therein has to be taken into consideration for the purpose of computing the expenditure. In the case before us, the assessee admittedly utilized the reserve available to the extent of ₹ 54,54,90,000/-. Therefore, no direct expenditure was incurred for earning the income which does not form part of total income. The assessee also has not incurred any expenditure by way of interest. Therefore, the second limb of the Rule 8D(2) is not applicable. Now coming to the third limb, the amount equal to 0.5% of the average value of the investment, income from which does not or shall not form part of total income as appearing in the balance sheet of the assessee on the first day and the last day of the previous year, has to be taken into consideration. This Tribunal is of the considered opinion that the third limb of Rule 8D(2) has to be applied. Therefore, the computation made by the Assessing Officer by adopting second limb of Rule 8D(2) may not be correct. Accordingly, the orders of the lower authorities are modified and the Assessing Officer is directed to take 0.5% of the average value of the investment, income from which does not or shall not form part of total income as appearing in the balance sheet of the assessee on the first day and the last day of the previous year, as expenditure for earning income.

Summary

Issues:
Disallowance under Section 14A of the Income-tax Act, 1961 for tax-free income received by a State Government undertaking.

Analysis:
The appeal was against the order of the Commissioner of Income Tax (Appeals)-III, Chennai, regarding the disallowance made by the Assessing Officer under Section 14A of the Income-tax Act, 1961. The assessee, a State Government undertaking, received tax-free income by investing in Tax Free Bonds. The counsel for the assessee argued that no external expenses were incurred as the investment was made using available reserves. However, the Departmental Representative contended that managerial, administrative, and monitoring expenses would naturally be incurred in making such investments. The CIT(Appeals) upheld the disallowance, citing the need for the assessee to incur expenses despite the claim of no expenditure. The Tribunal noted that the assessee, being a State Government-owned company in the finance and infrastructure business, would have market-related information. The Tribunal referred to Rule 8D of the Income-tax Rules, 1962, which provides for the computation of expenditure in such cases. It was observed that the assessee did not incur direct expenditure or interest expenses for earning the tax-free income. Consequently, the Tribunal directed the Assessing Officer to consider 0.5% of the average value of the investment as expenditure for earning income, modifying the lower authorities' orders and partially allowing the appeal.

In conclusion, the Tribunal's decision focused on the application of Rule 8D in determining the expenditure related to tax-free income earned by a State Government undertaking. The judgment clarified that even if no direct expenditure or interest expenses were incurred, a portion of the investment value should be considered as expenditure. The decision highlighted the importance of assessing expenses in such cases and directed the Assessing Officer to compute the expenditure accordingly.