2014 (9) TMI 1110 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Held that - A perusal of the profit and loss account of the assessee reveals that the assessee had a net positive interest income, under such circumstances, it cannot be said that the assessee had incurred interest expenditure for earning of exempt income. For the remaining amount of expenditure on account of common administrative expenses is concerned, the disallowance of ₹ 8,61,509/- u/s 14A seems to be excessive, considering the taxable income of the assessee of ₹ 3,20,54,051/-. Moreover, the mechanical application of rule 8D in this case is not warranted, considering the submissions of the assessee that major part of the investment was in unquoted shares of the group companies, the capital gains income from which was not exempt and even no dividend income was received from such investments. Thus as the assessee has earned dividend income, it might have incurred some expenses for the said purpose, in our view, the interest of justice will be well served if the disallowance u/s 14A is restricted to 10% of the remaining/common administrative expenses of ₹ 16,60,983/-. - Decided partly in favour of assessee

Summary

Issues: Disallowance under section 14A read with rule 8D of the Income Tax Rules.

Analysis:
1. The Assessing Officer (AO) made a disallowance of &8377; 8,61,509/- under section 14A of the Income Tax Act as the assessee had received dividend income claimed as exempt under section 10(34) without attributing any expenses to earn the exempt income.
2. The Commissioner of Income Tax (Appeals) upheld the disallowance, considering that since the assessee had earned dividend income, some expenses might have been incurred. The AO and the CIT(A) applied Rule 8D without objectively satisfying themselves with the correctness of the claim made by the assessee.
3. The appellant argued that the disallowance was excessive, especially considering the taxable income and the nature of investments in unquoted shares. The appellant proposed that the disallowance should be apportioned based on the ratio of taxable income to exempt income.
4. The Tribunal noted that the AO did not follow the guidelines of objective satisfaction as laid down by the Bombay High Court in a previous case. The AO and the CIT(A) mechanically applied Rule 8D without proper reasoning, disregarding the provisions of section 14A.
5. The Tribunal observed that the appellant had a net positive interest income, indicating that no interest expenditure was incurred to earn exempt income. Considering the facts and circumstances, the Tribunal restricted the disallowance under section 14A to 10% of the remaining administrative expenses, amounting to &8377; 16,60,983/-.
6. The Tribunal emphasized that its findings were specific to the case at hand and should not be considered a precedent for future cases. The appeal of the assessee was partly allowed based on the above analysis.