2016 (1) TMI 218 - AT - Income Tax

Disallowance under section 14A in respect of dividend income - Held that - The satisfaction of the Assessing Officer in this regard must be arrived at on an objective basis. The Assessing Officer cannot straight away proceed to apply rule 8D, without examining the merits of the assessee s claim, in respect of the expenditure disallowed by it under section 14A of the Act. For rejecting the correctness of the claim of the assessee, the Assessing Officer is required to give a reasoned finding that the expenditure or no expenditure disallowed by the assessee, is incorrect. We observe that in the present case the required exercise has not been done by the Assessing Officer before making disallowance by invoking the provisions of section 14A r.w. Rule 8D. The assessee has further contended that the assessee is having both interest bearing funds as well as own funds. However, the investment has been made from own funds. In case assessee s own funds are in excess of the investment made, then it has to be presumed that the investments have come from the interest-free funds available with the assessee. This view is supported by the decision rendered by the Hon ble Bombay High Court, in the case of CIT Vs HDFC Bank Ltd. (2014 (8) TMI 119 - BOMBAY HIGH COURT). In the instant case, the Assessing Officer has mechanically applied the provisions of section 14A read with Rule 8D without recording satisfaction or rejecting the claim of the assessee by giving any cogent reason. The Assessing Officer has failed to ascertain from records the source of investment made in the mutual funds by the assessee. - Decided in favour of assessee

Summary

Issues:
Disallowance under section 14A in relation to dividend income; Rejection of deduction u/s 80P; Invocation of Rule 8D without proper reasoning.

Analysis:
1. The appeal was filed against the order of the Commissioner of Income Tax (Appeals) confirming disallowance of Rs. 4,26,258 under section 14A in relation to dividend income of Rs. 3,78,251 for the assessment year 2010-11.
2. The assessee contended that no nexus was established between the expenditure and the earning of dividend income, and that disallowance was unjustified as no expenditure was incurred for earning the income or making investments in mutual funds.
3. The assessee also argued that the disallowance was not eligible for deduction u/s 80P, and that the interest income being more than the interest expense rendered the disallowance invalid.
4. The Assessing Officer made the disallowance based on Rule 8D, which was challenged by the assessee citing lack of proper recording of reasons for invoking the rule.
5. The assessee maintained that investments in mutual funds were made from own funds, and the disallowance exceeded the exempt income earned, thus not justifiable.
6. The Tribunal found merit in the assessee's arguments, noting that the disallowance exceeded the exempt income earned, and Rule 8D was invoked without proper reasoning or rejection of the assessee's claims.
7. The Tribunal set aside the impugned order, allowing the appeal of the assessee against the disallowance under section 14A.

Conclusion:
The Tribunal ruled in favor of the assessee, highlighting the lack of proper reasoning and justification for the disallowance under section 14A. The judgment emphasized the importance of establishing a clear nexus between expenditure and income, and the need for Assessing Officers to follow due process before invoking specific rules.