2013 (11) TMI 363 - AT - Income Tax

Disallowance u/s 14A - whether investment in unquoted shares be excluded while applying the disallowance provisions of section 14A read with rule 8D of the Rules since capital gains sale of unquoted shares are not exempted u/s 10(38) Adhoc disallowance of 5% Held that - Investment in unquoted shares did not result into short term capital gain during the year. If any dividend income was earned thereon the same was exempt as the value of investment in unquoted shares stood included at the last day of the financial year in the balance sheet AO recorded his satisfaction about the incorrectness of the claim of the assessee whereby assessee had disallowed 5% of the dividend income under section 14A of the Act - No valid basis adopted by the assessee, the AO was right in rejecting the method adopted by the assessee for disallowance computed under section 14A of the Act. Since there is no defect in the calculation of the AO which is as per section 14A r.w. Rule 8D, the case is decided against the Assessee.

Issues:
1. Disallowance under section 14A read with Rule 8D.
2. Applicability of Rule 8D for disallowance of expenses related to earning tax-free dividend income.
3. Exclusion of unquoted shares from disallowance provisions under section 14A.

Issue 1: Disallowance under section 14A read with Rule 8D:
The appeal involved an assessee, a share and stock broker, contesting the disallowance of Rs.19,56,521 under section 14A of the Income Tax Act for the assessment year 2008-09. The AO invoked Rule 8D to calculate the disallowance based on the dividend income earned by the assessee. The contention was that the disallowance made by the AO was only in respect of ½ % of the average value of investments generating exempt income, without attributing any specific expenditure directly related to the exempted income. The assessee argued that no borrowed funds were utilized for the investments and that administrative expenses were not incurred to earn dividend income. However, the CIT(A) upheld the AO's decision, citing the requirement under Rule 8D for determining such disallowances. The CIT(A) also noted that the onus was on the assessee to prove the expenditure incurred for earning dividend income, which the assessee failed to do. The decision was based on the provisions of section 14A(2) applicable for the assessment year, requiring the AO to determine disallowances in accordance with Rule 8D.

Issue 2: Applicability of Rule 8D for disallowance of expenses related to earning tax-free dividend income:
The assessee argued that Rule 8D should not be invoked as no expenditure was incurred to earn tax-free dividend income, and the investments were made out of own funds without any interest expenditure. The contention was that the disallowance made by the AO was not justified as no specific expenses were directly related to earning the exempt income. The assessee also claimed that the disallowance should be deleted as the administrative expenses and interest expenditure were not incurred for earning dividend income but for day-to-day business activities. However, the CIT(A) rejected these contentions, emphasizing the need for the assessee to provide evidence of expenditure related to earning dividend income. The CIT(A) referred to the decision of the Bombay High Court, holding that Rule 8D was applicable for the relevant assessment year, and upheld the disallowance made by the AO.

Issue 3: Exclusion of unquoted shares from disallowance provisions under section 14A:
The assessee further contended that the disallowance should not apply to unquoted shares as the capital gain from such investments was not exempt under section 10(38). The argument was supported by referencing various decisions highlighting that Rule 8D should not apply to investments generating capital gains subject to tax. The assessee provided calculations excluding the investment in unquoted shares to support the claim for appropriate relief. However, the Tribunal found no merit in this argument, stating that the disallowance under Rule 8D was correctly calculated based on the provisions of section 14A. The Tribunal emphasized that the AO had recorded satisfaction regarding the correctness of the disallowance made by the assessee, and since no valid basis was provided by the assessee to challenge the calculation, the disallowance upheld by the CIT(A) was maintained.

In conclusion, the Tribunal dismissed the appeal filed by the assessee, upholding the disallowance made under section 14A read with Rule 8D for the assessment year 2008-09, based on the provisions of the Income Tax Act and relevant judicial decisions.

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