2019 (7) TMI 1601 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - expenditure incurred by the assessee for earning of tax exempt dividend income - assessee had suo motu disallowed an expenditure - HELD THAT - The total investment during the year including the own old investments were only at ₹ 5809.29 lacs, which shows that the own / interest free funds of the assessee were sufficient to meet the investments. The issue is, thus, covered by the various decisions of the Hon'ble High Courts including that of the Hon'ble Jurisdictional High Court in Bright Enterprises Ltd vs CIT 2015 (11) TMI 342 - PUNJAB HARYANA HIGH COURT , wherein, it has been held that if assessee has funds / interest free funds available with it to make investment, the presumption will be that investment made by the assessee is out of own funds. The issue is also squarely covered by the recent decision of the Hon'ble Supreme Court in CIT (LTU) Vs. Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT - We, therefore, do not find any infirmity in the order of the Ld. CIT(A) on this issue - no disallowance of interest expenditure is attracted in this case. So far as the administrative expenses are concerned none of the lower authorities have pointed out any defect in the computation of proportionate disallowance computed by the assessee except that certain part of the administrative expenses were not taken into consideration which has been taken into consideration in the computation made above. Even the assessee has claimed that it has not incurred any administrative expenses for earning of tax exempt income. The Assessing Officer in this respect has not recorded any dissatisfaction taking into consideration the accounts of the assessee. The Hon'ble Bombay High Court in the case of Godrej Boyce Manufacturing Co 2010 (8) TMI 77 - BOMBAY HIGH COURT has held that under section 14A of the Act, resort can be made to Rule 8D of the Income Tax Rules for determining the amount of expenditure in relation to exempt income, if, the AO is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure. The satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Sub section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of such expenditure is correct. Neither the Assessing Officer nor the Ld. CIT(A) has pointed out any defect in the working given by the assessee in computing suo motu disallowance except that a certain part of tax relating to the personnel expenditure and other allowances were not taken into consideration. In the working given before us, as reproduced above, whereby, the proportionate amount of disallowance of expenditure to earn dividend income has been computed at ₹ 9,36,183/- by including the personnel expenditure and certain other expenses, as noted above. In view of this, the disallowance of administrative expenses is restricted to ₹ 9,36,183/-. However, the assessee will get the benefit / set off at the suo motu disallowance offered by the assessee in the return of income at ₹ 1,33,928/- and accordingly the addition is restricted to ₹ 8,02,255/-. - Decided partly in favour of assessee.

Summary

Issues:
Disallowance under section 14A read with Rule 8D of the Income Tax Rules.

Analysis:
The appeal was against an order dismissing the assessee's appeal due to lack of persecution, which was later recalled. The main issue was disallowance under section 14A related to expenditure for earning tax-exempt dividend income. The Assessing Officer noted the investment and dividend income figures, and the assessee's suo motu disallowance under section 14A. However, the Assessing Officer disagreed with the assessee's computation and invoked Rule 8D to calculate interest and administrative expenses disallowance, resulting in an addition to the assessee's income.

The assessee contended that it had sufficient interest-free funds for investments, citing legal precedents. The CIT(A) upheld the disallowance. The Tribunal found that the assessee indeed had enough interest-free funds for investments, as demonstrated by a chart. Citing various court decisions, including the Hon'ble Supreme Court, the Tribunal upheld the CIT(A)'s decision, concluding that no interest expenditure disallowance was warranted.

Regarding administrative expenses, the assessee provided a formula for disallowance, but the Tribunal noted that certain expenses were not considered. Referring to legal judgments, the Tribunal emphasized that the Assessing Officer must be objectively satisfied before applying Rule 8D. As the Assessing Officer did not follow the guidelines for objective satisfaction, the disallowance of administrative expenses was restricted. The Tribunal partly allowed the appeal, restricting the addition to the assessee's income and considering the benefit of the suo motu disallowance.

In conclusion, the Tribunal upheld the disallowance under section 14A but restricted the addition to the assessee's income for administrative expenses. The decision was based on the availability of interest-free funds for investments and the Assessing Officer's failure to follow guidelines for objective satisfaction in applying Rule 8D for administrative expenses disallowance.