2019 (2) TMI 1612 - AT - Income Tax

Disallowance u/s 14A - suo moto disallowance by assessee - addition deleted by the CIT(A) - AO carried out the assessment proceedings u/s 143(3) r.w.s 263 - HELD THAT - No interest expenditure has actually been claimed by the assessee during the year, and in absence of such claim of interest expenditure, there remains no basis for computing disallowance of interest under Rule 8D(2)(ii) of the IT, Rules. No justification in the finding of AO making disallowance of interest incurred u/s 14A of the Act at ₹ 1,67,32,308/- (Disallowance computed under rule 8D(2)(ii) of the IT Rules at ₹ 19,37,39,516 suo moto disallowance of net interest expenditure by the assessee at ₹ 17,70,07,208/-. Net interest expenditure is to be considered for applying the factors in Rule 8D(2)(ii). In the instant case, as the assessee has not claimed any interest expenditure against the total income no disallowance of interest is called for u/s 14A of the Act by applying Rule 8D(2)(ii) of the IT, Rules. As regards 3rd limb i.e. Rule 8D(2)(iii) of IT, Rules is concerned certainly some expenditure should have been incurred by the assessee for its regular business activities apart from earning exempt income which the assessee has submitted to have been incurred at ₹ 65,025/- towards salary disallowance and ₹ 63,483/- on account of Statutory Auditors Remuneration. After giving the set off to the above referred expenses remaining amount is ₹ 7,22,648/-(Rs. 851156-65025-63483). Therefore, in the given facts and circumstances of the case the disallowance u/s 14A under the 3rd limb of Rule 8D(2)(iii) of the I.T. Rules stands confirmed at ₹ 7,22,648/- for A.Y. 2008-09. In the result against the total addition made by the assessing officer at ₹ 1,76,09,474/-, we sustain the addition u/s 14A of the Act at ₹ 7,22,648/- of the Act and partly allow the revenue s appeal for A.Y. 2008-09. Disallowance of administrative expenses - Taking consistent view as taken for A.Y. 2008-09 observe that for A.Y. 2011-12 against the administrative expenses of ₹ 8,51,156/-, assessee has contended that disallowance if any to be made for administrative expenses should be restricted to ₹ 7,22,648/-. We find that for A.Y. 2008-09 average investments fetching exempt income stood at ₹ 421.98 cr. which has grown to ₹ 803.40 cr. for A.Y. 2011-112. We, therefore, being fair to both the parties and taking consistent approach, are of the view that disallowance of ₹ 7,50,000/- shall be justified towards the disallowance of administrative expenses which may have been incurred for administrating the investments fetching exempt income. We accordingly order so and direct the assessing officer to sustain the disallowance u/s 14A of the Act at ₹ 7,50,000/- under Rule 8D(2)(iii) of the IT, Rules.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D for Assessment Years 2008-09 and 2011-12.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D for Assessment Year 2008-09:

The Revenue challenged the deletion of an addition of ?1,76,09,474/- made by the Assessing Officer (AO) under Section 14A of the Income Tax Act read with Rule 8D. The assessee, a non-banking financial company (NBFC), had incurred interest expenditure and finance charges aggregating to ?21,85,75,704/- and earned interest income of ?4,15,68,496/- on inter-corporate loans. The assessee had also received ?15,57,030/- as dividend income, which is exempt under Section 10(34) of the Act. The assessee had suo moto disallowed ?17,70,07,881/- under Section 14A, which included net interest expenditure and demat charges.

The AO, however, computed a disallowance of ?1,76,09,474/- under Rule 8D, which was deleted by the Commissioner of Income Tax (Appeals) [CIT(A)], who upheld the assessee’s method of disallowance based on various judicial precedents and the assessee’s own case in previous years.

Upon appeal, the Tribunal noted that the AO had not made any disallowance under Rule 8D(2)(i) but had computed an interest disallowance of ?19,37,39,516/- under Rule 8D(2)(ii). The Tribunal found that since the assessee had not claimed any interest expenditure against the total income, there was no basis for computing disallowance of interest under Rule 8D(2)(ii). The Tribunal sustained the disallowance under Rule 8D(2)(iii) at ?7,22,648/- for administrative expenses. Thus, the Tribunal partly allowed the Revenue’s appeal for A.Y. 2008-09, sustaining the disallowance at ?7,22,648/- instead of ?1,76,09,474/-.

2. Disallowance under Section 14A of the Income Tax Act read with Rule 8D for Assessment Year 2011-12:

For A.Y. 2011-12, the issue was similar, with the AO making a disallowance of ?65,73,689/- under Section 14A. The assessee had suo moto disallowed net interest expenditure of ?45,25,54,995/- and finance charges of ?64,92,667/-. The AO had not made any disallowance under Rule 8D(2)(i) but had computed a disallowance of ?10,42,786/- under Rule 8D(2)(iii) for administrative expenses, which was deleted by the CIT(A).

The Tribunal, following its consistent view from A.Y. 2008-09, observed that the disallowance for administrative expenses should be justified at ?7,50,000/- considering the average investments fetching exempt income had grown. Thus, the Tribunal sustained the disallowance at ?7,50,000/- for A.Y. 2011-12, partly allowing the Revenue’s appeal.

Conclusion:

In both appeals, the Tribunal partly allowed the Revenue’s appeals by sustaining the disallowance under Section 14A read with Rule 8D at ?7,22,648/- for A.Y. 2008-09 and ?7,50,000/- for A.Y. 2011-12, respectively. The Tribunal emphasized that disallowance under Rule 8D(2)(ii) was not justified as the assessee had not claimed any interest expenditure against the total income. The disallowance under Rule 8D(2)(iii) was computed considering administrative expenses related to investments fetching exempt income.