2015 (11) TMI 1061 - AT - Income Tax

Disallowance u/s 14A - assessee made a suo motu disallowance u/s 14A - Held that - In the present case, it is seen that conditions of subsection 2 of section 14A are not satisfied. The AO has not cared to examine the accounts of the assessee and correctness of the claim made by the assessee. Ld. AO in the present case has straight away proceeded to apply Rule 8D for the purpose of disallowance u/s 14A, without satisfying or applying with the mandatory requirement of section 14A(2) r.w. Rule 8D. It is seen that the Assessee has given item wise justification for determination of the proportionate expense incurred on making investments earning tax-free income. No discrepancies have been pointed out by the AO before rejecting the claim of the Assessee. Since the AO has failed to comply with the statutory requirement, he could not have proceeded to make disallowance u/s 14A. It is further noted that out of total dividend income of ₹ 3,70,61,654/- received by the assessee company during the year, an amount of ₹ 3,00,71,654/- was on the investments in Mutual Funds of group companies for strategic reasons and ₹ 50,00,000/- on the preference shares of subsidiary company. Both of these amounts have been received on the investments made ostensibly for strategic reasons. In our considered view, strategic investments are not made for the purpose of earning tax-free income. These should not be considered for making disallowance u/s 14A The remaining amount of dividend was received on the investment in equity shares, only for an amount of ₹ 19,90,000/-. Thus, viewed from this angle also, the disallowance made by the AO is not justified. In view of the aforesaid discussion and keeping in mind the facts and circumstances of the case, disallowance made by the AO is reduced to the amount of ₹ 7,64,949/-, as was voluntarily offered by the assessee. - Decided in favour of assessee in part

Summary

Issues Involved:
1. Disallowance of expenditure under Section 14A of the Income-tax Act, 1961.
2. Application of Rule 8D for computing disallowance under Section 14A.
3. Correctness of the disallowance amount.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure under Section 14A:
The primary issue revolves around the disallowance of Rs. 1,79,85,122/- made by the Assessing Officer (AO) under Section 14A of the Income-tax Act, 1961. The assessee, engaged in investment financial advisory services, received dividend income of Rs. 3.70 crores, which was claimed as exempt. The assessee made a suo motu disallowance of Rs. 1,42,040/- in its return of income. However, the AO suggested a higher disallowance as per Rule 8D, leading to the disallowance of Rs. 1,79,85,122/-.

2. Application of Rule 8D for Computing Disallowance under Section 14A:
During the assessment proceedings, the AO observed that the investments required monitoring by senior professionals, given the high quantum involved and the substantial returns in the form of dividends. Despite the assessee's submission of a working sheet indicating a maximum disallowance of Rs. 7.64 lakhs, the AO invoked Rule 8D of Section 14A to disallow Rs. 1,79,85,122/-. The Ld. Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's disallowance, confirming that the AO's application of Rule 8D was justified.

3. Correctness of the Disallowance Amount:
The assessee contended that the AO did not properly consider its submissions and that the disallowance was contrary to law and facts. The assessee argued that the maximum disallowance should be Rs. 7,64,949/- based on the nature of its business and the specific facts of the case. The Tribunal noted that the AO failed to record satisfaction before rejecting the assessee's claim and increasing the disallowance. The Tribunal emphasized that the AO must examine the accounts and provide justification for any additional disallowance. The Tribunal referred to the judgment in Gravis Hospitality Ltd. vs. DCIT, where it was held that the AO must record satisfaction and provide reasoning before applying Rule 8D.

The Tribunal found that the AO did not satisfy the conditions of subsection 2 of Section 14A and failed to examine the accounts of the assessee. The Tribunal also noted that a significant portion of the dividend income was received from strategic investments, which should not be considered for disallowance under Section 14A. Referring to the Delhi High Court's decision in Cheminvest Ltd vs. CIT, the Tribunal concluded that strategic investments are not made for earning tax-free income.

Conclusion:
The Tribunal reduced the disallowance to Rs. 7,64,949/-, as voluntarily offered by the assessee, and allowed the appeal partly, emphasizing the need for the AO to record satisfaction and provide justification for any disallowance under Section 14A. The order was pronounced in the open court on 7.10.2015.