2015 (3) TMI 1260 - AT - Income Tax

Disallowance under Rule 8D(2)(iii) sec 14A - Held that - As found from the record that assessee itself has made a suo motu disallowance of ₹ 1 lakh under Rule 8D(2)(iii), however, the AO has computed disallowance under Rule 8D(2)(iii) at ₹ 2,14,85,474/-. The assessee company is basically engaged in the construction activity having total receipts of ₹ 3229.76 crores out of which dividend income is only ₹ 9.68 crores, which works out to be 0.309% of the total receipts. We found that out of total dividend income of ₹ 9.86 crores, the assessee received dividend income of ₹ 8 crores from the group concern only which do not require any extra efforts on account of administrative expenses etc. Accordingly, we do not find any infirmity in the order of CIT(A) for upholding the disallowance of ₹ 10 lakhs under rule 8D(2)(iii) which was claimed by the assessee at ₹ 1 lakh.

Summary

Issues:
- Appeal filed by revenue against CIT(A) order for assessment year 2009-2010.
- Disallowance under Rule 8D(2)(iii) for administrative expenses.
- Justification of restricting the disallowance by CIT(A).
- Similar grounds and circumstances in both appeals.

Analysis:
1. The appeals were filed by the revenue against the CIT(A) order for the assessment year 2009-2010. The grounds taken in ITA No.202/Mum/2013 primarily revolved around the disallowance under Rule 8D(2)(iii) concerning administrative expenses incurred to collect dividends. The AO had made a disallowance of &8377; 2,14,85,474 under this rule, which the CIT(A) restricted to &8377; 10 lakhs. The CIT(A) observed that the AO's disallowance was mechanical and lacked reasoning, leading to the decision to limit the disallowance to a lesser amount.

2. The AO's disallowance under Rule 8D(2)(iii) was based on the mandatory application of Rule 8D from A.Y. 2008-09 onwards, following the decision of the Bombay High Court in a specific case. The CIT(A) considered the appellant's arguments regarding the amalgamation of group companies, resulting in an increase in investments and average investment. The CIT(A) noted that most investments were made years before, and previous disallowances were consistently deleted by the CIT(A) in earlier assessment years.

3. The CIT(A) found that the AO's reliance on the High Court decision was mechanical, and the disallowance was not adequately reasoned. Considering the appellant's submissions and past disallowances, the CIT(A) decided to restrict the disallowance to &8377; 10 lakhs, confirming the addition made by the AO to that extent. The CIT(A) emphasized that the increase in investment due to amalgamation did not warrant the higher disallowance calculated by the AO.

4. The appellant's argument highlighted that most investments were in group companies, eliminating the need for additional administrative expenses. The tribunal upheld the CIT(A)'s decision to restrict the disallowance to &8377; 10 lakhs, as claimed by the appellant, based on the proportion of dividend income to total receipts and the nature of investments made in group concerns. The decision in ITA No.207/Mum/2013, with similar circumstances, also saw the disallowance restricted by the CIT(A) to a lower amount than calculated by the AO.

5. Ultimately, the tribunal dismissed both appeals of the revenue, affirming the CIT(A)'s decisions regarding the disallowance under Rule 8D(2)(iii) for administrative expenses. The judgments highlighted the importance of reasoned decision-making in such disallowances and the consideration of specific circumstances, such as amalgamations impacting investments, in determining the appropriate disallowance amount.