2017 (11) TMI 1683 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - receipt of dividend income which is exempt u/s 10(34) - investments from own source of funds - Held that - The assessee has undertaken activity/transactions of sale of mutual funds during the previous year relevant to the impugned assessment year which led to decline in investment as at year and necessarily expenses must have been incurred towards undertaking these transaction / activity of sale of mutual fund. Under these circumstances and keeping in view tribunal decisions in the preceding years in assessee s own case thus in order to maintain consistency and judicial discipline end of justice will be met in the instant case if further disallowance of expenditure u/s 14A is kept at an additional amount of 1, 00, 000/- towards administrative/misc. expenses to be added to the income of the assessee - Decided partly in favor of assessee.

Summary

Issues: Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D.

Analysis:
1. Background: The appeal was filed by the assessee against the appellate order passed by the Commissioner of Income Tax (Appeals) for the assessment year 2011-12 arising from the assessment order by the Assessing Officer under section 143(3) of the Income-tax Act, 1961.

2. Grounds of Appeal: The assessee challenged the disallowance made under Section 14A of the Act amounting to ?16,32,406/-, claiming it was not in accordance with Rule 8D of the Income Tax Rules, 1962. The AO disallowed this amount based on the average investment and voluntary disallowance by the assessee.

3. Assessee's Argument: The assessee contended that no other expenses were incurred apart from the voluntary disallowance made. They argued that investments were made from internal accruals, hence no finance cost was incurred for earning dividend income. The AO, however, applied Rule 8D(2)(iii) to make the disallowance.

4. CIT(A) Decision: The CIT(A) upheld the disallowance of 0.5% of the average value of investments under Rule 8D(2)(iii) after considering various expenses incurred by the assessee. The CIT(A) rejected the contention that no disallowance could be made without the AO being dissatisfied with the claim of the assessee.

5. Tribunal's Decision: The tribunal considered the arguments and orders from previous years in the assessee's case. It observed that the authorities did not deeply examine the expenses incurred for earning exempt income. The tribunal found that a further disallowance of ?1,00,000/- towards administrative expenses was appropriate, maintaining consistency with previous decisions and judicial discipline.

6. Conclusion: The tribunal partly allowed the appeal, ordering an additional disallowance of ?1,00,000/- towards administrative/miscellaneous expenses, in line with the decision of the Hon'ble Supreme Court. This decision aimed to ensure fairness and consistency in the treatment of disallowances under Section 14A of the Income Tax Act, 1961.

This detailed analysis highlights the key arguments, decisions, and rationale behind the judgment, focusing on the disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D.