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2015 (12) TMI 501 - AT - Income TaxDisallowance u/s 14A - CIT(A) deleted part disallowance - Held that - It is an admitted position that no expenses directly attributable to the earning of dividend income has been quantified as per Rule 8D(2)(i) of the Rules. Secondly, proportionate disallowance has been made towards interest expenses attributable to the average investments held by the assessee as per formula laid down in Rule 8D(2)(ii) of the Rules. The plea of the assessee is that non-interest bearing own funds as source far exceeds the corresponding application of funds toward investments. In the circumstances, the contention of the assessee that investment in shares cannot be said to be out of borrowed funds on which the interest expenditure has been incurred is well founded and deserves to be accepted. Mere utilization of OD / CC accounts for routing payment towards investment shares by itself has no consequence as such. The payment out of these overdrafts account is only a way of making payment. The overall position of interest-free funds, borrowed funds, etc. qua the corresponding investments yielding tax-free income is a relevant factor need to be borne in mind. It is not the case of the Revenue that any direct expenses including interest expenses have been incurred. in the case of CIT vs. HDFC Bank Ltd. reported in (2014 (8) TMI 119 - BOMBAY HIGH COURT), wherein the Hon ble High Court categorically held that in-principle, if there are funds available both interest-free and interest bearing, then a presumption would arise that investment would be out of interest-free funds generated or available with the assessee, if the interest-free funds were sufficient to meet the investments. Hence,disallowance retained by the CIT(A) under Rule 8D(2)(ii) of the Rules is not sustained in law and is therefore directed to be deleted - Decided in favour of assessee. Disallowance carried out under Rule 8D(2)(iii) of the Rules - Held that - We find that the assessee itself has made a disallowance of ₹ 35,007/- being one month salary of its Accountant towards estimated expenses attributable to the tax-free income. Thus, admittedly, certain expenditure is accepted to have been incurred by the assessee. It is the quantum of estimation which is subject matter of dispute. Statutory framework provides that Rule 8D(2)(iii) of the Rules will come into play when essentially there is certain amount of expenditure which can be said to have been incurred by the assessee for which quantification of exacting standards are not possible. Rule 8D(2)((iii) provides statutory formula for computation of disallowance to cover up probable indirect administrative expenses relatable to tax free income. The assessee has not given any scientific basis for arriving at its own estimation. Ostensibly therefore, preference need to be given to statutory formula over the ad-hoc estimation made by the assessee. The onus lay upon the assessee to prove the quantum of expenditure incurred in earning the taxfree income which remains un-discharged. Accordingly, we decline to interfere with the disallowance sustained by the CIT(A) under Rule 8D(2)(iii) of the Rules On facts, having regard to the colossal investments and dividend income, no cogent basis for disallowance of one month salary of an Accounts person is discernible. The assessee has failed to establish correctness of disallowance offered by it. The ingredients of prima facie satisfaction contemplated under S. 14A are thus present in the facts of the case. The mandate of Rule 8D will thus operate. Hence, the plea of the assessee is not sustainable. - Decided against assessee.
Issues Involved:
1. Disallowance of expenses under Section 14A of the Income-tax Act, 1961. 2. Satisfaction regarding correctness of expenses worked out by the assessee. 3. Disallowance of interest under Section 14A. 4. Ad-hoc disallowance of expenses. Detailed Analysis: 1. Disallowance of Expenses under Section 14A: The primary issue in this appeal concerns the disallowance of Rs. 6,35,558/- sustained by the CIT(A) against a total disallowance of Rs. 10,84,990/- made by the Assessing Officer (AO) under Section 14A of the Income-tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962. The AO noted that the assessee had declared tax-free dividend income of Rs. 4,11,66,682/-, which necessitated the invocation of Section 14A to disallow expenditure relatable to the exempt income. The breakup of disallowance included Rs. 5,82,322/- under Rule 8D(2)(ii) and Rs. 5,02,668/- under Rule 8D(2)(iii). 2. Satisfaction Regarding Correctness of Expenses: The assessee argued that the AO did not record satisfaction regarding the incorrectness of expenses worked out by the assessee before making the disallowance. The CIT(A) observed that the overdraft and cash credit accounts were utilized for investments in shares, implying that expenditure was incurred for generating tax-free income, thus justifying the application of Section 14A read with Rule 8D. 3. Disallowance of Interest under Section 14A: The assessee contended that investments were made from its own funds, citing the case of CIT vs. Reliance Utilities & Power Ltd. The Tribunal accepted this argument, noting that the assessee's interest-free funds far exceeded the investments, and thus, the disallowance of Rs. 3,59,897/- under Rule 8D(2)(ii) was not justified. The Tribunal relied on the decisions of the Bombay High Court in Reliance Utilities & Power Ltd. and HDFC Bank Ltd., which established that if interest-free funds are sufficient to cover investments, it should be presumed that investments were made from those funds. 4. Ad-hoc Disallowance of Expenses: Regarding the disallowance under Rule 8D(2)(iii), the assessee had made an ad-hoc disallowance of Rs. 35,007/- as reasonable estimated expenses. However, the CIT(A) and the Tribunal found this estimation to be without a scientific basis. The Tribunal upheld the CIT(A)'s disallowance of Rs. 3,10,668/-, emphasizing that Rule 8D(2)(iii) provides a statutory formula for estimating indirect administrative expenses related to tax-free income. The Tribunal noted that the assessee failed to provide a cogent basis for its estimation, and thus, the statutory formula should prevail. Conclusion: The Tribunal partly allowed the appeal, deleting the disallowance of Rs. 3,59,897/- under Rule 8D(2)(ii) but upholding the disallowance of Rs. 3,10,668/- under Rule 8D(2)(iii). The Tribunal also found that the AO had the requisite satisfaction for invoking Section 14A, given the facts and circumstances of the case. The appeal was thus partly allowed.
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