2016 (9) TMI 1552 - AT - Income Tax

Disallowance u/s 14A - Assessee suo motto added expenditure relating to exempt income in the computation - HELD THAT - The decision reported in COMMISSIONER OF INCOME TAX vs. HDFC BANK LTD ( 2014 (8) TMI 119 - BOMBAY HIGH COURT ) applies on all fours. In that decision it was held that when assessee s capital profit reserves surplus and current account deposits were higher than the investment in tax-free securities it would have to be presumed that investment made by the Assessee would be out of the interest-free funds available with Assessee and the additions made by the AO under Rule 8D(2)(ii) by disallowing the expenditure have to be deleted. When the assessee himself disallowed some amounts in respect of the expenses attributable to the exempt income the learned AO assumes jurisdiction to invoke section 14A read with Rule 8D of the Rules only when he reaches a conclusion that the claim of expenditure made by the assessee is not correct. We conclude that own funds of the assessee are sufficiently in excess of investments and the legal requirement of the AO to record the reasons for resorting to Section 14A read with Rule 8D of the Rules in this matter are conspicuously absent. Viewing from any angle we are convinced that there is no justification for the authorities below to sustain disallowing a sum of 8, 87, 670/- over and above which was added by the Assessee under section 14A of the Act read with Rule 8D of the Rules. We hold that the authorities below are not justified in disallowing a sum of 8, 87, 670/- over and above which was added by the Assessee under section 14A of the Act read with Rule 8D of the Rules and any addition on such score has to be deleted. We order accordingly.

Summary

Issues:
1. Whether the authorities were justified in disallowing a sum under section 14A of the Income Tax Act read with Rule 8D of the Rules.

Analysis:

Issue 1: Disallowance under section 14A of the Act read with Rule 8D of the Rules

The appeal arose from an order regarding the disallowance of a sum by the Assessing Officer (AO) under section 14A of the Income Tax Act read with Rule 8D of the Rules. The Assessee, a non-Banking Financial Company, had income from various sources, including dividends exempt from tax. The AO added a sum over what the Assessee had already disallowed, leading to the appeal. The Assessee contended that Rule 8D was incorrectly applied and that the AO should have accepted their disallowance. The key argument was that the AO did not record reasons for applying Rule 8D, as required by law.

The Tribunal analyzed the facts and submissions. It noted that the Assessee had sufficient own funds for investments, and the interest received was higher than the interest paid. The Tribunal referred to a relevant case law where it was held that when the Assessee's capital and reserves exceeded investments in tax-free securities, the investments were presumed to be from interest-free funds. The Tribunal also examined the administrative expenses and found that the AO did not consider the Assessee's disallowance while computing the sum. The Tribunal emphasized that the AO must record non-satisfaction with the Assessee's claim before applying Rule 8D.

Referring to legal precedents, the Tribunal highlighted that rejection of the Assessee's claim with cogent reasons was necessary before determining the expenditure. It cited a case where the AO was required to indicate reasons for rejecting the claim before resorting to Rule 8D. The Tribunal concluded that the Assessee's own funds were substantial, and the AO failed to justify the disallowance. Therefore, it held that the authorities were not justified in disallowing the sum under section 14A of the Act read with Rule 8D. The appeal of the Assessee was allowed, and the disallowance was ordered to be deleted.

In conclusion, the Tribunal's detailed analysis focused on the application of Rule 8D, the Assessee's financial position, the necessity of recording non-satisfaction by the AO, and legal precedents requiring cogent reasons for disallowance. The judgment clarified the requirements for invoking Rule 8D and emphasized the importance of justifying disallowances based on the Assessee's claims and financial circumstances.