2014 (1) TMI 228 - AT - Income Tax

Disallowance of administrative and general expenses Earning of exempt dividend income u/s 14A Application of Formula provided under Rule 8D of IT rules Held that - The assessee has incurred a total expenses of Rs.49,85,000/- towards staff cost, operating and administrative expense; establishment/general expenses of MIS department which is handling the investment apart from the activity of accounts and banking operations Thus, a reasonable estimate and allocation of expenses for the purposes of investment activity would be the 1/3 of the total expenses incurred on MIS department - the investment activity also includes investment in the foreign companies and the dividend of which is taxable as well as the investment which are not yielding dividend income - but some fixed maturity plans of mutual funds, then the same would be excluded while considering apportionment of the expenses incurred for earning the dividend income Decided partly in favour of Assessee.

Summary

Issues:
- Disallowance of administrative and general expenses attributable towards earning of exempt dividend income u/s 14A by applying Rule 8D of the IT Rules.

Analysis:
1. Issue of Disallowance of Expenses: The primary issue in this case was whether the Commissioner of Income Tax (Appeals) was justified in partially confirming the disallowance of administrative and general expenses attributable to earning exempt dividend income by applying Rule 8D of the IT Rules. The assessee had received a significant amount of dividend income and claimed it as exempt income. The Assessing Officer disallowed a specific sum towards administrative expenses attributable to the dividend income based on Rule 8D. The assessee challenged this before the Commissioner of Income Tax (Appeals), arguing that Rule 8D was not applicable for the relevant assessment year. The Commissioner, while acknowledging this, still made a partial disallowance based on a different calculation method.

2. Contentions of the Parties: The assessee's senior counsel contended that the Commissioner's decision was contradictory as he acknowledged that Rule 8D was not applicable but still used a similar formula for disallowance. The counsel argued that the assessee had already voluntarily disallowed a reasonable amount of expenses towards exempt income. The Departmental Representative, on the other hand, argued that even if Rule 8D was not applicable, a reasonable disallowance should still be made.

3. Tribunal's Decision: The Tribunal considered the submissions and relevant material. It noted that Rule 8D was indeed not applicable for the assessment year in question. Referring to a precedent, the Tribunal emphasized that any disallowance of administrative expenses under section 14A should be based on a reasonable basis. The Tribunal disagreed with the assessee's contention that no disallowance was warranted since the assessee had already voluntarily made a disallowance. It clarified that past orders did not act as res judicata when the disallowance was proposed as per the current provisions not examined previously.

4. Estimation of Disallowance: After analyzing the expenses incurred by the assessee and the nature of investments, the Tribunal estimated a reasonable disallowance of administrative expenses towards exempt dividend income. It excluded certain investments from the calculation and arrived at a figure of Rs. 14 lakhs as the disallowance attributable to exempt dividend income. Consequently, the Tribunal partly allowed the appeal of the assessee based on this revised calculation.

In conclusion, the Tribunal's decision provided clarity on the application of Rule 8D, emphasizing the need for a reasonable basis for disallowance of expenses under section 14A, even when the specific rule is not applicable. The judgment balanced the arguments of both parties and arrived at a fair and reasoned estimation for the disallowance, ultimately partially allowing the appeal of the assessee.