2014 (6) TMI 777 - AT - Income Tax

Disallowance made u/s 14A r.w. Rule 8D of the Act Voluntary disallowance of expenses by the company Held that - Rule 8D is mandatory - The legislature has prescribed Rule 8D with effect from 24th March, 2008 as the method for determination of amount of expenditure incurred in relation to exempt income - by using the word shall in sub-section (2) of Section 14A, the legislature has made it mandatory for the AO to determine the amount of expenditure incurred in relation to exempt income as per the method - the legislature has provided in Rules the method for apportionment of the expenditure between the exempt income and taxable income - the AO as well as the other statutory authorities under the Income-tax Act are also required to determine the amount of expenditure in relation to exempt income as per the method prescribed in the Rules Relying upon Bharat Hari Singhania Vs. CWT 1994 (2) TMI 55 - SUPREME Court Decided against Assessee. Computation of disallowance made by the AO Held that - The AO noted that the assessee has received substantial exempt income and the disallowance u/s 14A r.w Rule 8D is called for - the disallowance has three components and aggregate of all the three components is the amount which is to be disallowed - assessee has considered only the first component i.e., the amount of expenditure directly relating to exempt income. He has not considered Part (ii) and (iii) of Rule 8D(2) thus, the computation made by the assessee for disallowance u/s 14A(2) was not in accordance with Rule 8D and the AO has duly noted it in the assessment order and thereafter proceeded to compute the disallowance as per Rule 8D. The expenses which assessee claimed to have been not incurred for earning of exempt income have not been considered by the AO at all - the disallowance itself is ₹ 65,36,743 - assessee has not disputed the value of investment as taken by the AO for the purpose of computing the disallowance at half per cent as provided by Rule 8D(2)(iii) - whether the working of the disallowance of interest as per Rule 8D(2)(ii) is correct or not is of academic interest thus, the disallowance worked out by the AO which was the aggregate of three components as prescribed under Rule 8D(2) was ₹ 99,45,325 - finally, the AO restricted the disallowance to ₹ 52,56,197 thus, no relief is due to the assessee from the disallowance made by the AO at ₹ 52,56,197 Decided against Assessee.

Summary

Issues Involved:

1. Whether Rule 8D of Income Tax Rules is mandatory.
2. Whether the disallowance of Rs. 99,45,325/- under Rule 8D read with Section 14A was justified.
3. Whether the expenses claimed by the assessee were necessary for running the company and directly related to business activities.

Issue-wise Detailed Analysis:

1. Whether Rule 8D of Income Tax Rules is mandatory:

The assessee challenged the CIT(A)'s finding that Rule 8D is mandatory. The Tribunal noted that Section 14A(2) of the Income Tax Act mandates the Assessing Officer (AO) to determine the amount of expenditure incurred in relation to exempt income as per the prescribed method, which is Rule 8D. The Tribunal emphasized that the use of the word "shall" in Section 14A(2) makes it obligatory for the AO to follow Rule 8D. The Tribunal referenced the Hon'ble Apex Court's decision in Bharat Hari Singhania Vs. CWT, which supports the mandatory nature of such statutory rules. Consequently, the Tribunal rejected the assessee's ground, affirming that Rule 8D is indeed mandatory.

2. Whether the disallowance of Rs. 99,45,325/- under Rule 8D read with Section 14A was justified:

The assessee contended that the AO did not record satisfaction as required by Section 14A(2) before invoking Rule 8D. However, the Tribunal found that the AO had indeed recorded the necessary satisfaction. The AO noted the receipt of substantial exempt income by the assessee and issued a show-cause notice. After considering the assessee's reply, the AO found the disallowance proposed by the assessee (Rs. 2,97,440/-) inadequate as it only covered direct expenditure and did not account for other components under Rule 8D. The AO then computed the disallowance as per Rule 8D, which resulted in a total of Rs. 99,45,325/-. However, the AO restricted the disallowance to Rs. 52,56,197/- to match the declared business loss. The Tribunal upheld this approach, finding that the AO had correctly applied Rule 8D and recorded the requisite satisfaction.

3. Whether the expenses claimed by the assessee were necessary for running the company and directly related to business activities:

The assessee argued that various expenses such as filing fees, house tax, conveyance, insurance, electricity, building repair, etc., were not related to earning exempt income and should not be disallowed. The Tribunal noted that the AO had not considered these expenses in the disallowance computation. The AO only included the directly related expenditure (Rs. 2,97,440/-), interest (Rs. 34,08,582/-), and half percent of average investment (Rs. 65,36,743/-). The Tribunal found that the AO's computation was in line with Rule 8D and that the final disallowance of Rs. 52,56,197/- was justified. The Tribunal concluded that no relief was due to the assessee regarding the disallowance made by the AO.

Conclusion:

The Tribunal dismissed the assessee's appeal, affirming the CIT(A)'s order and the AO's application of Rule 8D. The Tribunal held that Rule 8D is mandatory, the AO had recorded the necessary satisfaction as per Section 14A(2), and the disallowance of Rs. 52,56,197/- was justified. The decision was pronounced in the open Court on 6.6.2014.