2014 (1) TMI 1035 - AT - Income Tax

Disallowance u/s 14A - Held that - On observing the application of the funds of the assessee, it would be evident that the company is mainly utilizing its funds for the purpose of investment in the equity shares - When the company is existing mainly for the purpose of investing in shares, it cannot be said that the expenditure was incurred wholly and exclusively for earning of interest income only in which the investment is of less than 5% of the assessee s funds - The only reasonable and logical conclusion can be to allocate the expenditure between the exempt income and non-exempt income The Ao has computed disallowance by applying Rule 8D which is applicable w.e.f. A.Y. 2008-09 - Since the actual expenditure incurred by the assessee was only Rs. 4,27,376/- out of which a sum of Rs. 7,000/- was separately disallowed by the Assessing Officer - The disallowance should be restricted to Rs. 4,20,376 - The assessee has not pointed out any mistake in the working of disallowance under Rule 8D by the Assessing Officer - The disallowance under Rule 8D as worked out as per the formula given in the Rules was more than the actual expenditure, the Assessing Officer has rightly restricted the disallowance to the expenditure actually incurred by the assessee - Decided against assessee.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act.

Analysis:
The appeal involved a dispute regarding the disallowance made by the Assessing Officer under Section 14A of the Income Tax Act, amounting to Rs. 4,20,376, which was upheld by the CIT(A). The primary contentions raised by the assessee were twofold: firstly, that the Assessing Officer did not record satisfaction as required by sub-sections (2) and (3) of Section 14A, and secondly, that no expenditure was incurred for earning exempt income. The assessee argued that since no expenditure was made for earning exempt income, no disallowance under Section 14A should be applicable.

Regarding the first contention, the Assessing Officer had indeed discussed the issue in detail and concluded that disallowance under Section 14A was necessary. The Tribunal acknowledged that the Assessing Officer had recorded satisfaction regarding the applicability of Section 14A after thorough examination, thereby disagreeing with the assessee's claim.

Addressing the second contention, the Tribunal noted that the assessee had not specifically claimed before the Assessing Officer that no expenditure was incurred for earning exempt income. Upon examination of the financial statements, it was found that the majority of the funds were invested in shares of various companies, indicating that the expenditure could not be solely attributed to earning interest income. Rule 8D was applied to allocate the expenditure between exempt and non-exempt income, resulting in a disallowance of Rs. 4,20,376, which was deemed appropriate given the circumstances.

Ultimately, the Tribunal dismissed the appeal, upholding the disallowance made by the Assessing Officer under Section 14A. The decision was pronounced on 17th January 2014, emphasizing the application of Rule 8D to determine the disallowance amount based on the actual expenditure incurred by the assessee.

This detailed analysis of the judgment showcases the thorough examination of the contentions raised by the parties and the Tribunal's rationale behind upholding the disallowance under Section 14A of the Income Tax Act.