2014 (10) TMI 655 - AT - Income Tax

Disallowance u/s 14A(1) Applicability of Rule 8D - Held that - CIT(A) has very appropriately, considered and dealt with the assessee s objection - The assessee s revenue streams are from trading operations, sale of investments, dividend and interest - It is maintaining composite accounts for its indivisible business, or qua its business segments, determination of any expenditure attributable to exempt income becomes relevant in view of section 14A as explained in GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT - The volume of the expenditure incurred in relation to a particular activity or income there-from, is a matter of fact, so that its estimation is again a factual matter If with no prescribed rule or basis, and without even discussing the merits of the method chosen, a method is adopted to resolve an issue, which is essentially one of quantification, and which is accepted by either party or even both, if only to give a quietus to the matter, the same is not reflective of its merits, much less of it being held out as a precedent - Rule 8D becomes effective, and mandatorily so, w.e.f. the current year there was no scope for either non-application of, or even scaling down of the amount workable with reference, to r. 8D(2)(iii) where the shares, on which the exempt income is received, are held as stock-in-trade, for the disallowance of interest u/r.8D(2)(ii). The disallowance under r. 8D has to be in any case restricted to the amount of the relevant expenditure actually claimed per the return of income thus, the matter is to be remitted back to the AO to allow the assessee an opportunity to present its case before him with reference to the expenditure claimed as also including expenditure which is in fact not relatable to the income not forming part of the total income - assessee is also in the business of share trading, so that the direct expenditure in respect thereof would also stand debited in its accounts and, accordingly, claimed - The onus to establish its case would only be on the assessee, which the AO shall decide by issuing definite finding/s of fact/s, limiting the disallowance under r.8D(2)(iii) to the amount of expenditure as so determined by him Decided partly in favour of revenue.

Summary

Issues Involved:

1. Disallowance under Section 14A(1) of the Income Tax Act.
2. Application of Rule 8D for computing disallowance.
3. Inclusion of shares held as stock-in-trade in the computation of disallowance.
4. Validity of the Assessing Officer's dissatisfaction with the assessee's working.
5. Application of precedents and consistency in disallowance methodology.

Detailed Analysis:

1. Disallowance under Section 14A(1) of the Income Tax Act:
The core issue in these cross appeals by the Assessee and the Revenue pertains to the disallowance under Section 14A(1) of the Income Tax Act, 1961. The assessee, a non-banking finance company, claimed no expenditure in relation to income not forming part of its total income, despite making a suo motu disallowance of Rs. 35,47,021, which was 2% of its tax-exempt dividend income. The Assessing Officer (A.O.) disagreed and applied Rule 8D, estimating indirect administrative expenditure at 0.5% of the average investment, leading to a further disallowance of Rs. 93,17,949.

2. Application of Rule 8D for Computing Disallowance:
The CIT(A) upheld the invocation of Rule 8D, mandatory from the current year, citing Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom). However, the A.O. included shares held as stock-in-trade in the computation, resulting in an anomalous situation where the disallowance exceeded the actual expenditure incurred. The CIT(A) directed the exclusion of stock-in-trade shares in determining the indirect expenditure related to dividend income, allowing partial relief to the assessee.

3. Inclusion of Shares Held as Stock-in-Trade in the Computation of Disallowance:
The Revenue contested the exclusion of shares held as stock-in-trade, arguing that Rule 8D does not distinguish between shares held as investment or stock-in-trade. The Tribunal noted that the expenditure related to exempt income must be ascertained and segregated, as per Section 14A. The Tribunal found the CIT(A)'s direction to exclude stock-in-trade shares without a factual or legal basis, emphasizing that Rule 8D applies irrespective of whether shares are held as stock-in-trade or investment.

4. Validity of the Assessing Officer's Dissatisfaction with the Assessee's Working:
The assessee argued that the A.O. did not record any dissatisfaction with its working, thus no disallowance should be made. The Tribunal rejected this, noting that the assessee did not disclose the basis for its suo motu disallowance, and the A.O. could not express satisfaction without being communicated the basis of the assessee's working. The Tribunal emphasized that expenditure must be determined with reference to accounts, and the onus is on the assessee to justify its claim.

5. Application of Precedents and Consistency in Disallowance Methodology:
The Tribunal addressed the assessee's reliance on previous years' disallowance methods, finding them factually and legally untenable. The Tribunal emphasized that Rule 8D, effective from the current year, provides a standardized method for estimation, removing arbitrariness. The Tribunal found no merit in the assessee's reliance on the method adopted for A.Y. 2004-05, noting significant variations in results when compared with A.Y. 2007-08. The Tribunal reiterated that Rule 8D is constitutionally valid as per Godrej & Boyce Mfg. Co. Ltd. (supra).

Conclusion:
The Tribunal concluded that Rule 8D was rightly invoked, and the exclusion of stock-in-trade shares was without basis. The Tribunal restored the matter to the A.O. to allow the assessee to present its case regarding the expenditure claimed, limiting the disallowance under Rule 8D(2)(iii) to the amount of expenditure determined by the A.O. Both appeals were partly allowed.