2016 (2) TMI 1187 - AT - Income Tax

Disallowance u/s 14A applying rule 8D - Held that - It is admitted by ld. AO himself that the investments in JV equity and mutual funds was made by the assessee out of own capital and reserves. The disallowance is made not on consideration of assessee s reply and merits of its contention but merely by mechanically applying rule 8D. These unambiguous observations on the part of AO clearly clinch the issue in favor of the assessee. Without prejudice to above in AY 2011-12, assessee earned dividend of only to the extent of ₹ 1,19,645/- whereas ₹ 59,01,52,708 has been disallowed u/s 14A by mechanical application of rule. In view of above judgments even in worst circumstances and if assessee s all explanation fail, disallowance u/s 14A can never exceed the exempt income. In AY 2011-12 also ld. AO has admitted the acquisition of JV shares and mutual funds from the same interest free own sources i.e. capital and reserves of company. Contribution to Employees PF - payments made by the assessee within the due date prescribed for filing the return - Held that - The issue in question is squarely covered by Hon ble Rajasthan High Court judgment in the case of CIT V. SBBJ 2014 (5) TMI 222 - RAJASTHAN HIGH COURT which has been relied by ld. CIT(A). Respectfully following Hon ble Rajasthan High court judgment this ground is dismissed.

Summary

Issues Involved:
1. Disallowance of expenditure under Section 14A of the Income Tax Act applying Rule 8D.
2. Contribution to Employees Provident Fund (PF) within the due date for filing the return.

Detailed Analysis:

1. Disallowance of Expenditure under Section 14A Applying Rule 8D:

Facts and Background:
The assessee, a listed company engaged in various business activities, earned dividends from old shareholdings. For AY 2008-09, the original assessment under Section 143(3) did not include any disallowance under Section 14A. However, the assessment was reopened under Section 147, and for AY 2011-12, the assessment was framed under Section 143(3). The Assessing Officer (AO) applied Rule 8D to disallow expenses attributable to exempt income, resulting in disallowances of Rs. 53,54,056 for AY 2008-09 and Rs. 1,29,52,621 for AY 2011-12.

Assessee's Contentions:
- The investments were made from the company's own funds, not borrowed funds.
- No expenditure was incurred to earn the exempt income.
- The AO did not consider the financial breakup and judicial precedents provided by the assessee.

CIT(A)'s Findings:
- The AO incorrectly calculated the investment amount and failed to consider the business necessity of holding controlling interest in JV shares.
- The assessee had sufficient own funds for investments, and the AO did not establish any proximate cause for disallowance.
- The AO did not provide evidence of any administrative or other expenditure incurred for earning exempt income.
- The AO mechanically applied Rule 8D without substantiating any direct or indirect expenditure incurred by the assessee to earn exempt income.

Judicial Precedents Referenced:
- Godrej and Boyce Mfg. Co. Ltd. v. CIT (2010) 328 ITR 81 (Bom)
- CIT v Leena Ramchandran (2011) 339 ITR 296 (Kerala)
- CIT vs. Taikisha Engineering India Ltd. 370 ITR 338 (Delhi)
- Joint Investments Pvt. Ltd. 372 ITR 694 (Delhi HC)
- Regent Automobiles Pvt. Ltd. ITA/684/DEL/2014 (Delhi ITAT)

Tribunal's Observations:
- The AO admitted that investments were made from the assessee's own funds, yet proceeded with disallowance by mechanically applying Rule 8D.
- No correlation or proximate nexus was established between the exempt income and the expenditure incurred.
- The AO failed to demonstrate why the assessee's explanation was unreasonable and unsatisfactory.
- The Tribunal upheld the CIT(A)'s orders, finding no inconsistency or infirmity.

Conclusion:
The Tribunal dismissed the revenue's appeals, confirming that the disallowance under Section 14A was not justified as the AO failed to establish any proximate relationship between the expenditure and the exempt income.

2. Contribution to Employees Provident Fund (PF):

Facts and Background:
For AY 2011-12, the issue was whether the contribution to Employees PF made within the due date for filing the return should be allowed.

CIT(A)'s Findings:
- The issue was covered by the Hon'ble Rajasthan High Court judgment in the case of CIT v. SBBJ (2014) 263 ITR 17.

Tribunal's Observations:
- The Tribunal upheld the CIT(A)'s decision, following the precedent set by the Hon'ble Rajasthan High Court.

Conclusion:
The Tribunal dismissed the revenue's appeal on this ground, confirming that the contribution to Employees PF made within the due date for filing the return is allowable.

Final Order:
The revenue's appeals were dismissed, and the orders of the CIT(A) were upheld. The judgment was pronounced in the open court on 4/02/2016.