2016 (7) TMI 1241 - AT - Income Tax

Disallowance u/s 14A - assessee had made a suo moto disallowance on prorata basis - Held that - We find that the AO had made a disallowance of ₹ 7.76 lakhs, that he disallowed an amount of ₹ 4.4lakhs on account of interest payment, that the assessee had made a suo moto disallowance of ₹ 3. 36 lakhs on prorata basis, that while making the disallowance the AO had not mentioned as to why the disallowance made by the assessee, amounting to ₹ 3,36,454/- was not acceptable. Without expressing any dissatisfaction over the method followed by the assessee for the disallowance, he should not have applied the provisions of Rule 8D r.w.s. 14A(2). We further find that assessee had own funds of ₹ 14.24 crores and investment made by it stood at ₹ 11. 99 crores. Therefore, incurring of interest expenditure for making investment had to be proved by the AO. We find that he has not dealt the issue at all and mechanically applied the provisions of section 14A r.w.r 8D. For disallowing any expenditure first the AO has to prove incurring of expenditure and its relation with earning of exempt income. If the assessee has not incurred any expenditure no disallowance can be made. Assessee has made disallowance of ₹ 3.36 lakhs under the head administrative/managerial expenditure which is more than the disallowance made by AO i.e. ₹ 2.99 lakhs. - Decided in favour of assessee.

Summary

Issues involved:
Challenging disallowance of expenses u/s.14A of the Income-tax Act.

Analysis:
1. The assessee, a company in the business of data dissemination services, filed its return declaring a loss. The Assessing Officer (AO) found exempt income from dividends and directed the assessee to provide details of expenses related to earning this income. The AO disallowed an amount under section 14A r.w.r 8D of the Income Tax Rules, which was added to the total income.

2. The assessee appealed before the First Appellate Authority (FAA), arguing that investments were made from own funds without borrowing, and no interest was paid for earning exempt income. The FAA upheld the AO's order, stating that disallowance for common administrative expenses was necessary and that Rule 8D applied for the relevant assessment year.

3. During the ITAT hearing, it was revealed that the AO had made disallowances under different heads without providing reasons for rejecting the assessee's disallowances. The ITAT observed that the AO mechanically applied Rule 8D without proving the incurring of expenditure related to earning exempt income. The ITAT also noted that the assessee had voluntarily made a higher disallowance than the AO's disallowance, indicating no need for further disallowances.

4. The ITAT reversed the FAA's order, emphasizing that the AO must prove the incurring of expenditure before disallowing it. As the assessee had already disallowed expenses voluntarily, the ITAT found the AO's disallowance unjustified. The ITAT ruled in favor of the assessee, allowing the appeal and setting aside the disallowance.

This detailed analysis of the judgment highlights the key arguments, findings, and decisions made by the authorities involved in the case regarding the disallowance of expenses under section 14A of the Income-tax Act.