2016 (9) TMI 1551 - AT - Income Tax

Disallowance u/s 14A - Computation of deduction - HELD THAT - Decision for making investment of such a high magnitude would definitely require involvement of high officials. The assessee has not furnished the basis for allocating 1% of Authorised Signatory s (CEO) salary expenses and 0.1% of his deputation expenses. It is also not known as to whether CEO alone took the decision for making investments in mutual funds. Normally such decisions are taken by consulting finance department and investment experts. However, such details are not available on record. It is difficult to accept the workings given by the assessee and we are of the view that the disallowance of ₹ 3,94,711/- made by the assessee appears to be on the lower side. However, since the number of transactions is limited, we are of the view that this issue may be settled by making an estimate on a reasonable basis. Accordingly, we are of the view that, considering the facts and circumstances of the case, the disallowance u/s 14A of the Act may be made at ₹ 10.00 lakhs in order to cover up the expenses relating to utilisation of human/other resources not considered by the assessee. In our considered view, the same would meet the ends of justice and we order accordingly. Accordingly the order passed by Ld CIT(A) stands modified accordingly and the AO is directed to disallow the above said amount of ₹ 10.00 lakhs u/s 14A of the Act. - Decided partly in favour of assessee.

Summary

Issues: Disallowance under section 14A of the Income Tax Act for assessment year 2010-11.

Analysis:
1. The appellant challenged the disallowance made by the Assessing Officer under section 14A of the Act for the assessment year 2010-11.
2. The appellant, engaged in transaction processing and payment services, received dividend income and claimed it as exempt. The AO disallowed a sum under Rule 8D(2)(iii) of the IT Rules, which the CIT(A) confirmed.
3. The appellant contended that minimal resources were involved in investments and dividend receipts, voluntarily disallowing a portion of administrative expenses. Various propositions were presented to argue against the disallowance.
4. The Department argued that Rule 8D was mandatory, citing a High Court judgment. They highlighted the appellant's investments and sales of mutual fund units.
5. The Tribunal examined the investments made by the appellant in subsidiary companies and mutual funds. It noted the appellant's investment and withdrawal patterns in mutual funds.
6. The appellant's allocation of salary and other expenses towards dividend income was detailed. The AO's disallowance under Rule 8D was questioned for lack of objective dissatisfaction with the appellant's workings.
7. The Tribunal observed increased investments in subsidiary companies and mutual funds, indicating significant investment activity. It raised concerns about the basis for allocating certain expenses.
8. Due to insufficient details provided by the appellant, the Tribunal found the voluntary disallowance to be on the lower side. An estimate of ?10.00 lakhs was deemed reasonable to cover unconsidered expenses, modifying the CIT(A)'s order accordingly.
9. The Tribunal partially allowed the appeal, directing the AO to disallow ?10.00 lakhs under section 14A of the Act to address resource utilization expenses.
10. The judgment was pronounced on 14.9.2016.