2014 (9) TMI 358 - AT - Income Tax

Expenses disallowed u/s 14A r.w Rule 8D Fund management fees - Held that - AO while working out disallowance under rule 8D(2)(i) has taken the total investment irrespective of the fact whether they have yielded income or not during the assessment year under consideration - The reasoning of the AO in this regard is actual earning or receipt of income will not be a condition for disallowance of such expenditure under the provisions of section 14A as it speaks about expenditure in relation to income which does not form part of the total income - even if no income was received, expenditure incurred can be disallowed u/s 14A - investment, which has not resulted in any income cannot be considered for the purpose of disallowance under Rule 8D(2)(i) - while computing disallowance under rule 8D(2)(iii), the average of the total investment of the assessee as appearing in the balance sheet on the first day and last day of the year irrespective of the fact whether it has yielded income or not can be considered for the purpose of disallowance - The use of the words does not or shall not in Rule 8D(2)(iii) connotes that income not only does not form part of total income during the year but it also shall not form part of total income at any time. Had it been the intention of the Rule framing authorities to disallow under rule 8D(2)(i) expenditure relating to total value of investment or income which is not earned during the relevant previous year, then, they would have used the expression does not or shall not form part of total income as appearing in rule 8D(2)(iii) instead of words does not form part of total income - AO cannot disallow expenditure relating to investment which has not yielded any exempt income during the previous year relevant to the AY thus, the AO is directed to disallow the expenditure relating to investments resulting in income earned/accrued which does not form part of total income of the impugned assessment year Decided in favour of assessee.

Summary

Issues Involved:

1. Disallowance of expenditure under Section 14A read with Rule 8D of the Income Tax Act.
2. Levy of interest under Sections 234B and 234D of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Expenditure under Section 14A read with Rule 8D:

Facts and Background:
The assessee, a non-banking financial company, filed its return of income for AY 2009-10 declaring 'Nil' income, which was initially processed under Section 143(1). Subsequently, the case was selected for scrutiny, and the Assessing Officer (AO) disallowed an expenditure of Rs. 1,97,36,624 under Section 14A read with Rule 8D. The assessee had initially disallowed Rs. 35,65,860 under the same provisions.

Assessee's Contentions:
The assessee argued that:
- Dividend income and income from mutual funds cannot be considered exempt as tax is paid by the payer under Sections 115-O and 115J.
- The fund management fees were not entirely towards exempt income as the assessee also earned taxable long-term capital gains.
- The AO should only disallow expenditure directly related to investments that yielded exempt income.
- The computation made by the AO was erroneous as it considered investments that did not yield any income.

Revenue's Contentions:
The Revenue argued that:
- The AO is empowered to disallow expenditure related to exempt income under Section 14A.
- The balance sheet did not provide a clear picture, necessitating the AO's computation.
- The assessee did not substantiate the details of expenditures related to earning exempt and taxable income.

Tribunal's Findings:
The Tribunal held that:
- The assessee's challenge regarding the applicability of Section 14A was not sustainable as the assessee itself had disallowed some expenditure under Section 14A.
- The AO's computation under Rule 8D(2)(i) was incorrect as it considered the total investment irrespective of whether it yielded income.
- Rule 8D(2)(i) refers to expenditure directly relating to income which does not form part of the total income, and only such expenditure should be disallowed.
- Rule 8D(2)(iii) involves disallowance based on the average value of investments, irrespective of income earned.
- The AO was directed to disallow expenditure only related to investments yielding exempt income during the relevant year.

Conclusion:
The Tribunal directed the AO to recompute the disallowance under Rule 8D(2)(i) by considering only investments that yielded exempt income. The computation under Rule 8D(2)(iii) was upheld as it was in conformity with the rule.

2. Levy of Interest under Sections 234B and 234D:

Facts and Background:
The assessee challenged the levy of interest under Sections 234B and 234D.

Tribunal's Findings:
The Tribunal noted that the assessee did not argue this ground during the hearing. Moreover, the levy of interest under these sections is consequential to the final determination of income by the AO.

Conclusion:
The Tribunal did not find it necessary to adjudicate this ground separately, as the levy of interest would follow the final determination of income.

Final Judgment:
The appeal of the assessee was partly allowed, with directions to the AO to recompute the disallowance under Rule 8D(2)(i) and uphold the computation under Rule 8D(2)(iii). The issue of interest under Sections 234B and 234D was left to be consequentially determined.