2015 (12) TMI 1788 - AT - Income Tax

Disallowance u/s. 14A read with Rule 8D(2)(iii) - CIT(A) upholding the disallowance of administrative expenses made by AO on investment in shares - whether the entire administrative expenses was incurred by the assessee for the purpose of investment in shares? - HELD THAT - We compared the heads of accounts of the expenses of the administrative and other expenses and in comparison we find majority of expenses claimed by the assessee are more or less on same accounts, i.e., auditors remuneration, depreciation, legal and professional fees, business support fees etc. On perusing the schedule L related to administrative expenses we find none of the accounts are prima facie directly identifiable as one meant for earning the exempt of income. Some of the expenses so claimed in the schedule related to other business expenses. Similar is the case with the other appeals under consideration as well.AO mechanically applied the provisions of Rule 8D(2)(iii) without examining the books of accounts of assessee and therefore, the addition is unsustainable in law. See CAPE TRADING P. LTD. VERSUS ASSTT. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 29, MUMBAI 2015 (8) TMI 211 - ITAT MUMBAI - Decided in favour of assessee

Summary

Issues: Disallowance of expenses u/s. 14A of the Act read with Rule 8D(2)(iii) for the common Assessment Year 2010-2011.

Analysis:
The Appellate Tribunal considered three appeals by the assessee against orders of the CIT regarding the disallowance of expenses under section 14A of the Act read with Rule 8D(2)(iii) for the Assessment Year 2010-2011. The issue raised in all three appeals was common, focusing on the disallowance of administrative expenses related to investments in shares. The Tribunal consolidated the appeals due to the common nature of the issue and the representation by the same counsels for all three cases.

The Tribunal noted that the AO had disallowed expenses based on Rule 8D(2)(iii) without considering the actual expenses incurred for earning dividend income. The Tribunal referred to a previous case involving a related concern where a similar issue was decided in favor of the assessee. The Tribunal found that the disallowance made by the assessee in that case was just and proper, leading to the allowance of the appeal.

Upon comparing the expenses claimed by the assessee with the provisions of Rule 8D(2)(iii), the Tribunal observed that the AO had mechanically applied the rule without proper examination of the books of accounts. The Tribunal concluded that the disallowance exceeded the expenses directly or proximately related to earning exempt income, rendering it unsustainable in law. The Tribunal emphasized that the provisions of Rule 8D(2)(iii) were unworkable and unrealistic in the absence of specific expenses debited to the P&L account with a direct nexus to dividend income.

Based on the findings in the previous case and the inadequacies in the application of Rule 8D(2)(iii), the Tribunal reversed the decisions of the CIT(A) in all three cases. Consequently, the grounds raised by the assessee in all appeals were allowed, resulting in the allowance of all three appeals by different assesses.

In conclusion, the Tribunal's detailed analysis highlighted the incorrect application of Rule 8D(2)(iii) by the AO, leading to the reversal of the disallowance of expenses in all three appeals. The Tribunal's decision was based on the principle that disallowances should be proportionate and directly linked to the income earned, ensuring a fair and just outcome for the assesses involved.