2012 (9) TMI 364 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - assessee contested that no interest cost had been incurred by the assessee on any borrowings for the purpose of investment nor any interest was debited to P&L account - Held that - There is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the AO is required to verify the correctness of such claim but in the instant case the AO was handicapped, because of failure of the assessee to furnish relevant details/particulars and accounts while making the disallowance in terms of provisions of sec. 14A . There is nothing in the assessment order or impugned order as to whether the assessee placed the relevant details & accounts before the AO or the ld. CIT(A) nor these authorities seems to have undertook any exercise to ascertain the details of expenditure incurred in managing and supervising the aforesaid huge investments in various funds & securities, objectively - set aside the order of the CIT(A) and restore the matter to the file of the AO for deciding the issue afresh.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Satisfaction of the Assessing Officer (AO) regarding the correctness of the assessee's claim.
3. Expenditure incurred in relation to earning exempt income.
4. Application of Rule 8D from AY 2008-09 onwards.
5. Verification of the claim that no expenditure was incurred.
6. Requirement for the AO to record satisfaction before disallowance.
7. Details of expenditure and accounts not provided by the assessee.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The primary issue in this appeal is the disallowance of Rs. 28,35,695 under Section 14A read with Rule 8D. The AO made this disallowance based on the provisions of Rule 8D, which mandates a disallowance of 0.5% of the average investment. The assessee argued that no expenditure was incurred for earning the exempt income other than the Portfolio Management Services (PMS) fees, which was already added back voluntarily.

2. Satisfaction of the Assessing Officer (AO) regarding the correctness of the assessee's claim:
The AO's satisfaction with the correctness of the assessee's claim is a prerequisite for invoking Section 14A(2) read with Rule 8D. The AO did not explicitly record his dissatisfaction with the assessee's claim, which is a necessary condition for applying Rule 8D. The CIT(A) upheld the AO's decision, implying that the AO was not satisfied with the correctness of the assessee's claim.

3. Expenditure incurred in relation to earning exempt income:
The assessee claimed that no expenditure was incurred for earning the exempt income, except for the PMS fees. However, the CIT(A) and AO concluded that the assessee failed to substantiate this claim with evidence from the books of accounts. The CIT(A) noted that managing and supervising investments involve indirect expenses, which are embedded in the overall administrative expenses.

4. Application of Rule 8D from AY 2008-09 onwards:
The CIT(A) and AO applied Rule 8D, which is mandatory from AY 2008-09 onwards. The CIT(A) emphasized that the AO is bound to compute disallowance under Section 14A read with Rule 8D from AY 2008-09 if the assessee's claim is not satisfactory.

5. Verification of the claim that no expenditure was incurred:
The CIT(A) and AO found that the assessee did not provide sufficient evidence to support the claim that no expenditure was incurred for earning the exempt income. The assessee's argument that investments were managed by a director through a bank did not convince the authorities, as no detailed accounts or expenditure breakdowns were provided.

6. Requirement for the AO to record satisfaction before disallowance:
The AO must record his satisfaction regarding the correctness of the assessee's claim before making a disallowance under Section 14A. The CIT(A) concluded that the AO's invocation of Rule 8D implied dissatisfaction with the assessee's claim. The Tribunal emphasized the need for the AO to provide cogent reasons for rejecting the assessee's claim and to determine the disallowance based on a reasonable method.

7. Details of expenditure and accounts not provided by the assessee:
The Tribunal noted that the assessee did not furnish relevant details of expenditure and accounts to the AO or CIT(A). The absence of such details hindered the authorities' ability to verify the claim that no expenditure was incurred for earning the exempt income.

Conclusion:
The Tribunal set aside the order of the CIT(A) and restored the matter to the AO for fresh examination. The AO is directed to re-evaluate the issue in light of the Tribunal's observations and judicial pronouncements, ensuring a speaking order is passed. The assessee is instructed to provide all relevant details of expenditure incurred in managing and supervising the investments, along with the necessary accounts and cash flow statements. The appeal is allowed for statistical purposes.