2014 (9) TMI 516 - AT - Income Tax

Application of section 14A r.w rule 8D Dividend on shares or mutual funds Held that - It could not be said that the satisfaction of the AO is a bald satisfaction without specifying any particular item of the expenditure which was incurred for earning of dividend income relying upon Maxopp Investment Ltd. Vs. CIT - 2011 (11) TMI 267 - Delhi High Court - the investment in the shares is only ₹ 6,46,000/- plus ₹ 2,42,648/- but, it is in large number of companies - The investment in the mutual funds is ₹ 14,58,81,026 - the assessee invested in more than 50 different mutual funds - It cannot be believed that no effort was involved in the entire process - when there is investment in large number of mutual funds and moreover during the year various mutual funds were liquidated and investment made in various new mutual funds, certainly, the assessee must be keeping details in a systematic manner and some staff must be doing that job. When there is a mixed account and the assessee is carrying on the business, it is practically impossible to specify which particular portion of the expenditure was incurred for the purpose of earning dividend income - the assertion of the assessee that no expenditure was incurred for earning of dividend income is a bald assertion, contrary to the obvious facts on record and the satisfaction of the AO that some expenditure was incurred for earning of exempt income is based upon the facts of the case thus, a proper satisfaction as required by Section 14A was duly recorded by the AO and, he was fully justified in working out the disallowance as per Rule 8D of the Income-tax Rules, 1962 - as far as the discrepancy in the working of Rule 8D is concerned, the matter is remitted back to the AO for verification of working of Rule 8D Decided partly in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962.
2. Satisfaction of the Assessing Officer regarding the applicability of Section 14A.
3. Correctness of the working of disallowance as per Rule 8D.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962:
The assessee contested the disallowance of Rs. 7,52,242 made by the Assessing Officer (AO) under Section 14A, arguing that no expenditure was incurred to earn exempt income, which primarily consisted of dividends from shares and mutual funds. The assessee claimed that dividends are received automatically without any effort or expenditure. The AO, however, applied Rule 8D to determine the disallowance, asserting that some expenditure was inherently involved in managing investments that generate exempt income. The Tribunal upheld the AO's application of Rule 8D, noting that the assessee's claim of incurring no expenditure was not credible given the extensive investments and transactions in mutual funds.

2. Satisfaction of the Assessing Officer regarding the applicability of Section 14A:
The Tribunal examined whether the AO had recorded proper satisfaction as required by Section 14A. The AO had issued a questionnaire to the assessee and discussed the assessee's reply and relevant case law before concluding that expenses related to earning exempt income were involved. The Tribunal found that the AO's satisfaction was based on a reasoned analysis of the facts and circumstances, and thus, was not a "bald assertion." The Tribunal emphasized that when an assessee is involved in both business and investment activities, it is practically impossible to segregate specific expenses related to exempt income, justifying the use of Rule 8D.

3. Correctness of the working of disallowance as per Rule 8D:
The assessee argued that the AO's computation under Rule 8D was defective, particularly pointing out that the interest payment of Rs. 1,54,187 was related to late payment of TDS and should not be apportioned for earning dividend income. Additionally, the assessee claimed errors in the figures used for calculating the average amount of investment. The Tribunal directed the AO to verify and correct any clerical mistakes in the working of Rule 8D, ensuring that the disallowance is computed accurately as per the prescribed method. The AO was instructed to provide the assessee with an adequate opportunity to be heard during this verification process.

Conclusion:
The Tribunal concluded that the AO had properly applied Section 14A and Rule 8D, given the facts of the case and the nature of the assessee's investments. However, it acknowledged the need to verify and correct any computational errors in the disallowance under Rule 8D. The appeal was thus partly allowed for statistical purposes, with directions for the AO to re-examine the disallowance calculation.

Decision pronounced in the open Court on 29th August, 2014.