2015 (7) TMI 905 - AT - Income Tax

Disallowance u/s.14A(1) - applicability of rule 8D - Held that - The reference to the turnover ratio, which it says would easily be at 4 to 5, stands made by it only toward assigning a weight to this predominant intent for acquiring shares, and no other purpose, itself stating that it cannot be said to be scientific in the sense that it is not amenable to measurement. The said reference has been clearly misconstrued in pleading for lowering the ratio (than 1/5) on the basis of a high turnover ratio. The assessee in the present case has, in fact, rather than earning income, suffered a loss, defeating the assessee s argument. In fact, we observe the entire borrowing in the present case to be toward funding the assessee s current assets. We are, therefore, not moved in any manner to disturb the said ratio from 1/5, which shall apply. It needs to be emphasized that the prescription under r.8D(2)(iii) is not based on the volume or quantum of expenditure incurred by the assessee, but, as tribunal clarifies, only on one variable, i.e., investment in the relevant assets (on an average). As such, raising a claim for a lower disallowance, i.e., than that as statutorily prescribed per r.8D(2)(iii), a constitutionally valid provision, would not obtain. The only exception, which would in fact be in terms of r. 8D itself, would be where the expenditure incurred is below that arrived at per the prescribed formula, so that following the same would lead to an absurdity, as observed by the tribunal in the case of disallowance of total interest attributable to shares held as stock-in-trade. In the facts of the present case, excluding the security transaction tax (STT), would yet leave indirect expenditure at ₹ 131.6 lacs, as against the disallowance of ₹ 18.57 lacs. There is, in our view, no scope for excluding the legal and professional expenses, details of which are absent, incurred as it is in the course of regular business, which gives rise to both taxable income as well as the tax free dividend income. In view of the foregoing, a ratio (1/5 or lower), i.e., as in the case of interest expenditure for indirect expenditure, thus, is not feasible for being prescribed or laid down on facts or in law.

Issues Involved:
1. Quantum or extent of disallowance under Section 14A(1) of the Income Tax Act, 1961.
2. Applicability of Rule 8D for disallowance computation.
3. Consideration of interest and indirect administrative expenditure.
4. Validity of the assessee's claim that no borrowed funds were used for investment in shares.
5. Scaling down the disallowance ratio for interest and indirect expenditure.

Detailed Analysis of the Judgment:

1. Quantum or Extent of Disallowance under Section 14A(1):
The primary issue in this appeal is the quantum or extent of disallowance under Section 14A(1) of the Income Tax Act, 1961, related to the assessee's investment in shares yielding tax-exempt dividend income. The assessee did not make any disallowance under Section 14A(1), leading the Assessing Officer (A.O.) to apply Rule 8D and compute the disallowance at Rs. 99,72,855/-, including interest and indirect administrative expenditure.

2. Applicability of Rule 8D for Disallowance Computation:
The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the A.O.'s application of Rule 8D, which was mandatory for the current year, validating the estimate of indirect expenses attributable to tax-exempt income. The assessee argued against the use of borrowed funds for investment in shares, but the CIT(A) found this claim unsubstantiated based on the balance sheet.

3. Consideration of Interest and Indirect Administrative Expenditure:
The assessee's representative argued that the case was covered by the Tribunal's decision in Dy. CIT vs. Damani Estates & Finance (P.) Ltd., which suggested a disallowance at 20% of the proportionate interest. The representative further argued for scaling down the ratio due to the high turnover ratio of the assessee's share trading business, which was significantly higher than the average investment.

4. Validity of the Assessee's Claim that No Borrowed Funds were Used for Investment in Shares:
The Tribunal observed that the decision in Damani Estates & Finance (P.) Ltd. applied to the present case, confirming the applicability of Section 14A where shares are held as stock-in-trade. The Tribunal noted that the turnover ratio per se has no bearing on the interest expenditure, which is directly related to the investment in shares. The Tribunal found the assessee's argument for further scaling down the disallowance ratio misconceived and upheld the 20% ratio.

5. Scaling Down the Disallowance Ratio for Interest and Indirect Expenditure:
Regarding the disallowance under Rule 8D(2)(iii) for indirect expenditure, the Tribunal referred to the comprehensive answer provided in Damani Estates & Finance (P.) Ltd. The Tribunal emphasized that the prescribed ratio for indirect expenditure (0.5% of the investment value) is nominal and based on a stable investment activity. The Tribunal rejected the plea for a lower disallowance ratio, noting that the statutory provision under Rule 8D(2)(iii) is constitutionally valid and not based on the volume of expenditure incurred by the assessee.

Conclusion:
The Tribunal partially allowed the assessee's appeal, maintaining the 20% disallowance ratio for interest attributable to the investment in shares and upholding the prescribed ratio under Rule 8D(2)(iii) for indirect expenditure. The appeal was partly allowed, and the order was pronounced in the open court on 23.1.2015.

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