2017 (5) TMI 1665 - AT - Income Tax

Disallowance u/s 14A read with rule 8D(2)(iii) - set off suo moto disallowance by assessee - CIT(A) upheld the disallowance of administrative expenses made by the AO on investment in shares holding that the entire administrative expenses was incurred by the assessee for the purpose of investment in shares - HELD THAT - The ground in present case is identical to the ground in the case of Cape Trading Pvt. Ltd. vs. ACIT, Mumbai (2015 (8) TMI 211 - ITAT MUMBAI) and the other appeals discussed in the foregoing paras. The co-ordinate Benches of ITAT Mumbai have already decided the identical issue in favour of the assessee. Following the decisions of coordinate Benches, we decide the sole ground of appeal in favour of the assessee and delete the disallowance made by the Assessing Officer.

Summary

Issues:
1. Disallowance of administrative expenses on investment in shares for A.Y 2010-11.
2. Disallowance of expenses under Section 14A of the I.T. Act for A.Y 2011-12.

Issue 1: Disallowance of administrative expenses on investment in shares for A.Y 2010-11:

The appellant contested the disallowance of administrative expenses by the CIT(A) and AO, claiming it was solely for the purpose of investment in shares. The appellant referred to a previous Mumbai Tribunal order supporting their case. The AO disallowed a significant amount beyond the appellant's claim. The Mumbai Tribunal's decision in Cape Trading Pvt. Ltd. vs. ACIT highlighted that disallowances under Rule 8D(2)(iii) should not exceed actual expenses debited in the Profit & Loss account related to exempt income. The Tribunal found that most expenses were specific to business activities and not directly linked to earning exempt income. Consequently, the disallowance should only cover expenses directly related to exempt income. As the provisions of Rule 8D(2)(iii) were deemed unworkable, the Tribunal deleted the disallowance, following previous decisions. The Tribunal concluded in favor of the appellant, citing consistency with prior rulings.

Issue 2: Disallowance of expenses under Section 14A of the I.T. Act for A.Y 2011-12:

The appellant challenged the disallowance made by the CIT(A) under Section 14A for A.Y 2011-12. Given the identical nature of the grounds with the A.Y 2010-11 appeal, the Tribunal decided in favor of the appellant based on the findings of the previous appeal. Consequently, the disallowance of expenses for A.Y 2011-12 was also set aside, aligning with the decision made for A.Y 2010-11.

In both cases, the Tribunal allowed the appeals filed by the assessee, emphasizing the importance of direct nexus between expenses and exempt income for disallowances under Rule 8D(2)(iii). The decisions were based on the principle that disallowances should not exceed actual expenses related to exempt income, as established in previous Mumbai Tribunal rulings.