2013 (10) TMI 695 - AT - Income Tax

Disallowance u/s 14A - CIT (A) sustained the disallowance - Expenditure in relation to income which does not form part of Total Income - Held That - In case, the assessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment - Following decision of Maxopp Investment Ltd. & Others Versus Commissioner of Income Tax 2011 (11) TMI 267 - Delhi High Court - Decided against assessee.

Summary

Issues:
Sustenance of disallowance of Rs.51,12,715/- u/s 14A of the Act.

Analysis:
The appeal was against the disallowance of Rs.51,12,715/- u/s 14A of the Act in relation to the AY 2008-09. The assessee, engaged in direct selling of consumer products, earned dividend income claimed as exempt u/s 10(34) of the Act. The AO, based on relevant judgments, made the disallowance under Rule 8D. The CIT (A) sustained the disallowance due to the substantial increase in investments yielding exempt income, indicating top management involvement. The Tribunal found the provisions of section 14A applicable as per judicial precedents, emphasizing that the first appellate authority's powers are co-terminous with the AO's. The argument that the AO did not explicitly record satisfaction about expenses in relation to exempt income was dismissed, as the CIT (A) had adequately addressed the issue.

The Tribunal rejected the request to remit the matter to the AO for computation based on a 'reasonable basis' for the AY 2008-09, as Rule 8D was held to be prospective from that year onwards. The Tribunal upheld the CIT (A)'s decision to sustain the disallowance under clause (iii) of Rule 8D(2) at 0.5% of the average value of investment. The appeal was dismissed, affirming the impugned order on the issue of disallowance u/s 14A.

In conclusion, the Tribunal upheld the disallowance under section 14A as per Rule 8D, considering the substantial increase in investments yielding exempt income and the involvement of top management. The Tribunal emphasized the applicability of Rule 8D from the AY 2008-09 onwards and rejected the request to remit the matter for computation based on a 'reasonable basis.' The first appellate authority's decision was deemed justified, and the appeal was dismissed.