2015 (10) TMI 2757 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Computing disallowance applying the proportionate method - HELD THAT - Out of the total expenses claimed of ₹ 31,13,082/-, the amount disallowed in relation to dividend is of ₹ 25,36,669/-. Now, this is evidently absurd on the face of it and the assessee is correct in contending that since there is huge other income, the quantum of disallowance is entirely unreasonable. Rather, a reasonable disallowance can be made, if the accounts of the assessee are considered, without taking recourse to Rule 8D of the Rules. As assessee has contended that the total expenses claimed (as above) being ₹ 31,13,082/-, the total income ( as above) being of ₹ 80,189,889/- and out of this income, dividend being of ₹ 904,668/-, the disallowance of expenses needs to be worked out by applying the proportionate method, as per which, the disallowance works out to ₹ 35120/- it is found to be acceptable. The total income, the dividend and the total expenses claimed being as above, as discussed, the disallowable expenses would work out to ₹ 35,120/-, applying the proportionate method. Therefore, the disallowance is restricted to ₹ 35,120/-. Accordingly, Ground No.1 is partly accepted. Disallowance u/s 94(7) - According to CIT(A) as per section 94(7) only the short term capital loss ought to have been added - HELD THAT - Since no worthwhile challenge had been laid to the above finding of the ld. CIT(A) by the assessee before us, finding no error therein, the action of the ld. CIT(A) in restricting the addition

Summary

Issues:
1. Disallowance under section 14A r.w.r. 8D(ii)
2. Disallowance of income from property and claim of depreciation
3. Disallowance of administrative expenditure under Rule 8D(2)(iii)
4. Disallowance of u/s 94(7) of the Act

Issue 1 - Disallowance under section 14A r.w.r. 8D(ii):
The AO disallowed &8377; 42,67,498 under section 14A of the Income-tax Act, 1961. The CIT(A) deleted &8377; 17,30,834 under Rule 8D(2)(ii), stating no direct or indirect expenditure was incurred in earning tax-free income. However, the CIT(A) upheld the disallowance of administrative expenditure under Rule 8D(2)(iii) due to lack of separate accounts for expenses related to tax-free income. The appellant argued that the disallowance of &8377; 25,36,664 was unreasonable and invoked "K.P. Varghese vs. CIT" to support their claim. The Tribunal found the disallowance absurd given the significant other income and restricted it to &8377; 35,120 using the proportionate method, partially accepting the appeal.

Issue 2 - Disallowance of income from property and claim of depreciation:
The AO disallowed &8377; 2,00,000 under section 94(7) of the Act. The CIT(A) reduced the disallowance to &8377; 3,745, considering only the short-term capital loss of that amount. The Tribunal upheld the CIT(A)'s decision as the appellant did not challenge it effectively, rejecting the appeal on this issue.

Issue 3 - Disallowance of administrative expenditure under Rule 8D(2)(iii):
The CIT(A) maintained the disallowance of administrative expenditure under Rule 8D(2)(iii) due to the lack of separate accounts for expenses related to tax-free income. The Tribunal analyzed the appellant's arguments and found the disallowance unreasonable, restricting it to &8377; 35,120 using the proportionate method, partially accepting the appeal.

Issue 4 - Disallowance of u/s 94(7) of the Act:
The AO disallowed &8377; 2,00,000 under section 94(7) of the Act. The CIT(A) reduced the disallowance to &8377; 3,745, considering only the short-term capital loss of that amount. The Tribunal upheld the CIT(A)'s decision as the appellant did not effectively challenge it, rejecting the appeal on this issue.