2016 (8) TMI 1416 - AT - Income Tax

Disallowance u/s. 14A r.w. Rule 8D - Held that - AO has not recorded any dissatisfaction with reference to the maintenance of accounts and the expenses disallowed by the assessee for earning exempt income. AO has not recorded any reasons for not accepting the expenditure disallowed by the assessee for earning exempt income. The funds available with the assessee are much more than the investments made during this Assessment Year. Therefore in view of the submissions made before the Ld. CIT(A) that the funds available with the assessee are much more than the investments made by the assessee we restore this issue to the file of the AO with a direction to verify as to whether the funds available with the assessee are more than the investments and in case the available funds are more than the investments no disallowance is required to be made u/s. 14A r.w. Rule 8D(2)(ii) - Appeal filed by the assessee is allowed for statistical purpose.

Summary

Issues:
Disallowance under section 14A r.w. Rule 8D of the Act.

Analysis:
The appeal was filed against the order of the Ld. CIT(A)-7, Mumbai for the assessment year 2008-09. The sole issue raised by the assessee was the disallowance under section 14A r.w. Rule 8D of the Act. The Assessing Officer computed the disallowance based on the exempt income earned by the assessee as dividend income. The assessee had disallowed a certain amount towards expenditure attributable to earning dividend income, but the Assessing Officer made a further disallowance. The assessee contended before the Ld. CIT(A) that the Assessing Officer did not provide valid reasons for rejecting the assessee's estimation of expenditure and that no disallowance was necessary under section 14A. The Ld. CIT(A) acknowledged the lack of reasons for rejecting the assessee's estimation but upheld the disallowance citing that the assessee's investments exceeded available funds.

The Ld. Counsel for the assessee argued that the available surplus/own funds were greater than the investments made during the assessment year, contrary to the Ld. CIT(A)'s observation. The counsel referred to a subsequent assessment year's order where the issue was sent back for verification regarding investments made out of accumulated funds. The counsel relied on a decision of the Hon'ble Bombay High Court to support the argument that if there are sufficient accumulated funds and investments are made, disallowance under section 14A is not warranted, even if there were borrowings. The Ld. Departmental Representative supported the lower authorities' orders.

After considering the submissions and reviewing the orders, the Tribunal noted that the Assessing Officer did not express dissatisfaction with the accounts or the expenses disallowed by the assessee. Additionally, the funds available with the assessee were more than the investments made during the assessment year. Following the submissions and the decision in the case of HDFC Bank Ltd Vs DCIT, the Tribunal directed the Assessing Officer to verify if the available funds exceeded investments. If so, no disallowance was required under section 14A r.w. Rule 8D(2)(ii). The Tribunal also instructed the Assessing Officer to recompute the disallowance under Rule 8D(2)(iii) by excluding investments not yielding exempt income. The appeal was allowed for statistical purposes.

In conclusion, the Tribunal's decision focused on the lack of reasons for disallowance, the discrepancy between available funds and investments, and the applicability of the decision in HDFC Bank Ltd case to determine the necessity of disallowance under section 14A.