2015 (11) TMI 1734 - AT - Income Tax

Disallowing of expense on account of exempted income - addition u/s 14A - Held that - A company cannot earn dividend without its existence and management. Investment decisions are very complex in nature. It requires substantial market research day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares, mutual funds etc., at the most, appropriate time. The investment requires availability of funds and consequential blocking of funds. It is well known that capital has cost and the element of cost is represented by interest. Besides investment decisions are generally taken in the meeting of Board of Directors for which administrative expenses are incurred. It is therefore, not correct to say that income can be earned by incurring no or nominal expenditure. We further observed that originally at the time of assessment order, assessee did not offer any disallowance at its own but disallowed the expenses to the tune of ₹2,74,150/- at its own during the appellate stage. However, we find that the rule 8D is applicable w.e.f 24th day of March 2008 i.e. from the assessment year 2008-09. Hence the provisions of Rule 8D does not apply to the relevant year under consideration i.e. Assessment year 2007-08. So prior to the applicability of Rule 8D, different ITAT benches has considered 1% of dividend income as reasonable disallowance under section 14A of the Act. Disallowance was made at 1% of the dividend income under the provisions of section 14A. However, we are finding from the CIT(A) order that the assessee has offered the disallowance of ₹ 274150.00 which is more than 1% of the exempted income. Therefore we are inclined to restrict the disallowance at the same amount. - Decided in favour of assessee.

Summary

Issues:
- Disallowance of expenses on account of exempted income under section 14A of the Income Tax Act, 1961 for assessment year 2007-08.

Analysis:
The appeal arose from the order of the Commissioner of Income Tax (Appeals) VI, Kolkata, where the assessee challenged the disallowance of expenses amounting to &8377;14,40,020/- on account of exempted income dividend. The Assessing Officer disallowed the expenses based on the application of rule 8D, which was considered retrospective in nature as per the order of Hon'ble ITAT (Special Bench) Mumbai in the case of M/s Daga Capital. The assessee contended that no additional expenses were incurred beyond maintaining the corporate structure and day-to-day business operations. However, the CIT(A) upheld the disallowance, considering the proportion of expenses to income and relying on the decision of the Hon'ble Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd. v. DCIT. The CIT(A) found the disallowance made by the Assessing Officer to be appropriate and reasonable, leading to the dismissal of one ground and allowance of another.

The Appellate Tribunal observed that earning dividend income required substantial efforts in investment decisions, market research, and administrative expenses, which could not be considered nominal or non-existent. The Tribunal referred to the decision of the Chennai Bench in Southern Petrochemical Industries v. DCIT to emphasize the strategic and complex nature of investment decisions. While the rule 8D was not applicable for the relevant assessment year, different ITAT benches had previously considered 1% of dividend income as a reasonable disallowance under section 14A. The Tribunal referred to various case laws to support this approach. Despite the assessee voluntarily disallowing &8377;2,74,150/-, which exceeded 1% of the exempted income, the Tribunal decided to restrict the disallowance to the same amount.

In conclusion, the Tribunal allowed the assessee's appeal, emphasizing the complexity and cost involved in earning dividend income and considering the precedents regarding the reasonable disallowance under section 14A. The decision was pronounced on 13/11/2015.