2015 (9) TMI 281 - AT - Income Tax

Disallowance u/s 14A - AO has rejected the suo motu disallowance - Held that - Rule 8D is applied then disallowance would work out at ₹ 37,08,098/- which is almost four times the actual expenditure claimed by the assessee. So, according to ld. AR, the disallowance has to be made, it should be confined to the actual expenditure incurred and claimed for earning exempt income. First submission of assessee that total expenditure claimed as per P&L account is ₹ 18,35,064. It has been stated that out of this amount, ₹ 2,59,835/- is the administrative expenses and ₹ 5,40,397/- pertains to the two companies which have amalgamated with the assessee, namely, M/s. Kiran Securities Pvt. Ltd. and M/s. Soarma Vinimay Pvt. Ltd. and from whom no dividend income has been earned and declared by the assessee. Thus to the said extent, according to assessee, no disallowance of expenditure of ₹ 5,40,397/- is warranted. As regards the expenditure of ₹ 15,74,196/- it is apparent that it includes a sum of ₹ 2,22,729/- (Kiran Securities Pvt. Ltd. ) and a sum of ₹ 3,17,679/- (Soarma Vinimay Pvt. Ltd.) as claimed by the ld. AR which are pertaining to amalgamating companies and further amalgamation expenses of ₹ 8,58,617 (of Mayuka Investment Ltd.), capital increase expenses of ₹ 70,000/- (of Mayuka Investment Ltd.) are claimed by the ld. AR; and loss on sale of investment ₹ 11,695/- which have no nexus with the exempt income. Thus, according to ld. AR, the said amounts cannot be disallowed. The remaining expenditure according to AR is ₹ 93,477/- (Rs.15,74,156/- - ₹ 2,22,729/- ₹ 3,17,679/- ₹ 8,58,617/- ₹ 70,000/- ₹ 11,695 (Page 57 of PB) ₹ 93,477/-). This sum of ₹ 93,477/-, according to ld. AR, includes audit fees of ₹ 16,545/- and filing fees ₹ 2,088/-, which are in the nature of routine business/statutory expenditure. In view of the aforesaid submission of the AR, we feel that if these expenditures are considered in the light of the suo motu expenditure of ₹ 50,000/- as claimed by the assessee for earning exempt income need to be reconsidered by the AO. Therefore, we set aside the impugned order and restore the matter back to the file of the AO for deciding the issue in view of the aforesaid submissions of ld. AR and thereafter, determining the question of disallowance u/s 14A of the Act. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Additional disallowance under Section 14A of the Income-tax Act, 1961.
2. Consideration of expenses of transferor companies for disallowance under Section 14A.
3. Allocation of expenses towards investments in fixed assets and property.
4. Inclusion of statutory expenses in disallowance calculation.
5. Limitation of disallowance to actual expenditure incurred.

Detailed Analysis:

1. Additional Disallowance under Section 14A:
The primary issue revolves around the additional disallowance of Rs. 7,59,498/- made by the Assessing Officer (AO) under Section 14A of the Income-tax Act, 1961. The AO's disallowance was based on the observation that the assessee company had made significant investments in shares, earning substantial dividend income that is not chargeable to tax. The AO rejected the assessee's suo motu disallowance of Rs. 50,000/- and recomputed the disallowance at Rs. 8,09,498/- using a proportional method not prescribed by the Act read with Rule 8D of the Income-tax Rules, 1962. The Income Tax Appellate Tribunal (ITAT) noted that the AO's method was not in accordance with the Rules, and the disallowance should be confined to the actual expenditure incurred and claimed for earning exempt income.

2. Consideration of Expenses of Transferor Companies:
The assessee argued that the expenses incurred by the two transferor companies, Kiran Securities Pvt. Ltd. and Soarma Vinimay Pvt. Ltd., should not be considered for disallowance under Section 14A as these companies neither made any investments nor earned any dividend income. The ITAT acknowledged that the expenses of these companies, which amounted to Rs. 5,40,397/-, should not be included in the disallowance calculation since they had no nexus with the exempt income.

3. Allocation of Expenses towards Investments in Fixed Assets and Property:
The assessee contended that the AO did not consider investments in fixed assets and immovable property advances while allocating expenses for disallowance under Section 14A. The ITAT agreed that the AO should have included these investments, which amounted to Rs. 3.97 crores in immovable property and Rs. 3.63 lakhs in fixed assets, in the total capital employed for a more accurate allocation of expenses. This adjustment would reduce the disallowance amount.

4. Inclusion of Statutory Expenses in Disallowance Calculation:
The assessee argued that statutory expenses such as audit fees and filing fees, which are necessary regardless of income earned, should not be included in the disallowance calculation. The ITAT recognized that these routine business/statutory expenditures, amounting to Rs. 18,633/- (audit fees of Rs. 16,545/- and filing fees of Rs. 2,088/-), should be excluded from the disallowance computation.

5. Limitation of Disallowance to Actual Expenditure Incurred:
The ITAT emphasized that the disallowance under Section 14A cannot exceed the actual expenditure incurred by the assessee. The total expenditure claimed by the assessee was Rs. 18,35,064/-, out of which significant portions were related to amalgamation and capital increase expenses, which had already been added back by the assessee in its computation of income. The ITAT directed the AO to reconsider the disallowance in light of these submissions and limit it to the actual expenditure incurred for earning exempt income.

Conclusion:
The ITAT set aside the impugned order and restored the matter back to the AO for a fresh decision, considering the detailed submissions of the assessee. The AO was instructed to determine the disallowance under Section 14A in accordance with the actual expenditure incurred, excluding expenses of the transferor companies and statutory expenses, and including investments in fixed assets and property in the total capital employed. The appeal of the assessee was allowed for statistical purposes, and the assessee was to be given a reasonable opportunity of being heard.