2016 (2) TMI 1220 - AT - Income Tax

Addition u/s 14A read with rule 8D(2)(iii) - Disallowance of administrative expenses - investment in shares claiming the entire administrative expenses was incurred by the assessee for the purpose of investment in shares - HELD THAT - As decided in CAPE TRADING P. LTD. VERSUS ASSTT. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 29, MUMBAI 2015 (8) TMI 211 - ITAT MUMBAI from the details of the expenses, we find that the printing and stationary expenses and bank charges & commission are only two items which could have direct or proximate nexus with the investment and exempt income. Therefore, the disallowance u/s 14A r.w. Rule 8D(2)(iii) cannot exceed to the allocable expenses incurred by the assessee for a composite activity resulting taxable and exempt income. The working of disallowance under Rule 8D(2)(iii) by the AO clearly shows that it exceeds not only the expenses debited and claimed by the assessee which could have a proximate nexus with the earning of exempt income but also to the total expenditure debited by the assessee in the P&L account under the head administrative and other expenses. It turns out to be contradictory to the actual facts and gives absured results in complete disregard to the scheme of disallowance u/s 14A. Accordingly, we delete the disallowance made by the Assessing Officer. - Decided in favour of assessee.

Summary

Issues involved:
Challenge to disallowance of administrative expenses on investment in shares.

Analysis:
1. The appellant, a private limited company engaged in real estate development, trading, and investment activities, filed a return for the assessment year 2010-11, declaring total income of Rs. 1,39,92,884. The case was selected for scrutiny, and during assessment, the Assessing Officer noted an investment of Rs. 42,65,76,469 as on 31/03/2010. The AO asked for an explanation regarding disallowance under Section 14A of the Income Tax Act. The appellant claimed to have disallowed Rs. 25,000 for administrative expenses and Rs. 62,660 for demat charges. The AO, disregarding the appellant's contentions, made an additional disallowance of Rs. 8,41,256, resulting in a total disallowance of Rs. 8,66,256.

2. The Assessment Order was challenged before the CIT(A), who upheld the disallowance. The appellant then appealed to the Tribunal, arguing that a previous Mumbai Tribunal order supported their case. The Departmental Representative, however, supported the disallowance under Rule 8D. The Tribunal analyzed the Mumbai Tribunal's decision in Cape Trading Pvt. Ltd. vs. ACIT, Mumbai, where it was held that disallowance under Rule 8D cannot exceed the total expenses debited to the Profit & Loss account. The Tribunal found that most expenses were specific to business activities and not directly related to earning exempt income. Therefore, the disallowance should be limited to expenses directly linked to exempt income, such as printing and stationary expenses and bank charges.

3. The Tribunal concluded that the CIT(A) erred in upholding the disallowance of administrative expenses on investment in shares, similar to the case of Cape Trading Pvt. Ltd. vs. ACIT, Mumbai. Following the precedent set by the Mumbai Tribunal, the Tribunal ruled in favor of the appellant, deleting the disallowance made by the Assessing Officer.

4. Consequently, the Tribunal allowed the appeal for the assessment year 2010-11, setting aside the disallowance of administrative expenses on investment in shares.