2015 (7) TMI 278 - AT - Income Tax

Disallowance under Section 14A - investments made in the capital account of the partnership firm - CIT(Appeals) accepting the ad hoc expenditure on estimation of 10% of the incomec- Held that - The assessee itself claimed before the Assessing Officer that it had made a disallowance of ₹ 5,67,277/- being 10% of the income earned from the partnership firm, under Rule 8D. Therefore, it is an admitted position of the assessee that a disallowance has to be made. This Tribunal is of the considered opinion that when the assessee itself admitted that a disallowance has to be made with regard to earning of the income which is exempted from taxation under the Income-tax Act in view of the language employed by the Parliament in Section 14A(2) that an Assessing Officer shall determine and the Rule 8D(1), this Tribunal is of the considered opinion that the method prescribed in sub-Rule (2) of Rule 8D has to be adopted. Since the Parliament and Rule making authority employed the language shall determine , it is obligatory on the part of the Assessing Officer to determine the expenditure as provided in sub-Rule (2) of Rule 8D. Therefore, estimation of expenditure at 10% may not be in accordance with provisions of sub-Rule (2) of Rule 8D. Also carefully gone through the order of this Tribunal in the assessee s own case this Tribunal found that the assessee has interest-free own funds to the extent of ₹ 42.95 Crores and out of these, the investments were made. Therefore, this Tribunal found that the investments were made from the interest free funds, therefore, no disallowance is required. However, the provisions of Section 14A and Rule 8D and the language employed by the Parliament shall determine were not brought to the notice of the earlier Bench. Therefore, this Tribunal confirmed the order of the Assessing Officer wherein 10% of the income from the firm was disallowed. Thus it is mandatory for the Assessing Officer to adopt the method prescribed in Rule 8D(2) of the Act. Therefore, the CIT(Appeals) is not justified in accepting the ad hoc expenditure on estimation of 10% of the income. Thus the entire issue of Rule 14A r.w. Rule 8D is remitted back to the Assessing Officer to determine the expenditure incurred by the assessee as per the method prescribed in the second limb of Rule 8D(2) of the Income-tax Rules, 1962 - Decided in favour of revenue for statistical purposes.

Summary

Issues:
Disallowance of expenses under Section 14A of the Income Tax Act, 1961 read with Rule 8D of Income-tax Rules, 1962.

Analysis:

Issue 1: Disallowance of expenses under Section 14A of the Income Tax Act
The Revenue appealed against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of Rs. 37,87,806 under Section 14A of the Income Tax Act, 1961. The main contention was related to the investments made by the assessee in a partnership firm and the claim of exempted income. The Departmental Representative argued that the Assessing Officer must determine the expenditure related to earning exempted income as per Section 14A(2) and Rule 8D. The representative for the assessee contended that a portion of income was already disallowed, and no further disallowance was necessary. The Tribunal analyzed the provisions of Section 14A and Rule 8D, emphasizing the mandatory nature of determining expenditure as per the prescribed method under Rule 8D(2). The Tribunal held that an ad hoc estimation of 10% was not in line with the statutory provisions, and the Assessing Officer must determine the expenditure using the method specified in Rule 8D(2).

Issue 2: Application of Rule 8D of Income-tax Rules, 1962
The Tribunal examined Rule 8D of the Income-tax Rules, 1962, which provides a method for determining the amount of expenditure in relation to income not included in the total income. It highlighted that when the Assessing Officer is not satisfied with the claim of expenditure made by the assessee, or if no expenditure was incurred in relation to total income, the amount of expenditure must be determined as per Rule 8D(2). The Tribunal emphasized the importance of the Assessing Officer's satisfaction regarding the accounts of the assessee and the necessity to follow the prescribed method under Rule 8D(2) for computing expenditure related to earning exempted income. It noted that the language used in Section 14A and Rule 8D, such as "shall determine," imposes an obligation on the Assessing Officer to determine the expenditure as per the specified method. The Tribunal set aside the lower authorities' orders and remitted the issue back to the Assessing Officer to determine the expenditure in accordance with Rule 8D(2) after providing a reasonable opportunity to the assessee.

In conclusion, the appeal of the Revenue was allowed for statistical purposes, emphasizing the mandatory nature of determining expenditure under Section 14A and Rule 8D as per the prescribed method.