2015 (12) TMI 1766 - AT - Income Tax

Disallowance u/s 14A - expenses related to exempt incomes - assessee company received interest income on tax free bonds, income tax refund and fixed deposits - assessee company also claimed divided income - The assessee company submitted that out of abundant caution and to buy peace of mind and to avoid litigation , the assessee company has voluntarily offered for disallowance of expenditure of ₹ 14,42,900/- us/ 14A of the Act which includes ₹ 5,13,278/- suo moto disallowed in the return of income filed with the Revenue .The assessee company submitted that AO erred in saying that the assessee company has not offered for disallowance any expenditure u/s 14A of the Act in the return of income filed with the Revenue while fact of the matter is that the assessee company disallowed expenditure of ₹ 5,13,278/- u/s 14A of the Act. Held that - The contentions of the assessee company that the CIT(A) has accepted the method of computation adopted by the assessee company for assessment year 2005-06 and 2006-07 can not be accepted as first of all principles of res-judicata are not applicable to income tax proceedings, Secondly Rule 8D of Income tax Rules, 1962 is applicable from assessment year 2008-09. On merits based on facts and circumstances of the case , we have observed above that the substantial activity of the assessee company is to make investments and substantial amount of revenue stream for the assessee company is from dividends and interest income which are exempt from tax. Thus, most humbly we reject the contentions of the assessee company and we uphold the disallowance of total expenditure of ₹ 43,48,277/- made by the AO under Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 , in the case of the assessee company keeping in view the peculiar facts and circumstances of the case. Decided against the assessee.

Summary

Issues Involved:
1. Disallowance of Rs. 43,48,277/- under Section 14A of the Income Tax Act.

Detailed Analysis:

1. Disallowance under Section 14A:
The primary issue in this case is the disallowance of Rs. 43,48,277/- under Section 14A of the Income Tax Act, 1961, which pertains to expenses incurred in relation to income that does not form part of the total income.

Facts of the Case:
The assessee company, engaged in trading various materials and dealing in shares and securities, received substantial exempt income from dividends and interest on tax-free bonds. During the assessment proceedings, the Assessing Officer (AO) observed that no part of the expenses was considered for earning the exempt income. Consequently, the AO applied Rule 8D of the Income Tax Rules, 1962, which is applicable from the assessment year 2008-09 onwards, to compute the disallowance under Section 14A.

AO's Computation:
The AO calculated the disallowance as follows:
- Interest paid: Nil
- Average investments: Rs. 86,96,55,303/-
- Expenses directly attributable to exempt income: Rs. 5,13,278/-
- 0.5% of average value of investments: Rs. 43,48,277/-
Thus, the AO added Rs. 43,48,277/- to the assessee's total income under Section 14A.

Assessee's Appeal to CIT(A):
The assessee contended that it had already disallowed Rs. 5,13,278/- voluntarily and that the additional disallowance should not exceed Rs. 9,29,622/-. The assessee argued that the investments were made from its own surplus funds, and no borrowed funds were utilized. The CIT(A), however, upheld the AO's application of Rule 8D, confirming the disallowance of Rs. 43,48,277/-.

Further Appeal to ITAT:
The assessee appealed to the ITAT, reiterating that it had voluntarily disallowed Rs. 14,42,900/- to avoid litigation. The assessee argued that the AO did not provide a specific finding on the incorrectness of the disallowance offered by the assessee before applying Rule 8D. The assessee also highlighted that its primary activity was trading, not investment management.

Revenue's Argument:
The Revenue supported the AO's application of Rule 8D, asserting that the AO rightly disallowed the expenses as per the rules.

ITAT's Analysis:
The ITAT observed that the assessee's substantial activity involved managing investments, as evidenced by the significant dividend and interest income compared to the trading income. The ITAT noted that Rule 8D is applicable from the assessment year 2008-09 and is a machinery provision to compute disallowance under Section 14A. The ITAT found that the authorities below correctly applied Rule 8D, given the substantial investment activities of the assessee.

Conclusion:
The ITAT upheld the disallowance of Rs. 43,48,277/- under Section 14A read with Rule 8D, dismissing the assessee's appeal. The ITAT confirmed the CIT(A)'s order, finding no infirmity in the application of Rule 8D to the assessee's case.

Result:
The appeal filed by the assessee company was dismissed, and the disallowance of Rs. 43,48,277/- under Section 14A was upheld.