2018 (7) TMI 2187 - AT - Income Tax

Disallowance u/s. 14A r.w.r. 8D(2)(ii) and under Rule 8D(2)(iii) being administrative expenditure - HELD THAT - As seen from the order of the AO as well as the CIT(A) there is no finding that assessee has incurred any expenditure for earning the said dividend income. There was finding on diversion of borrowed funds hence the disallowance of interest under Rule 8D(2)(ii) does not arise. Assessee had own fund more that the investments. Consequently disallowance under Rule 8D(2)(ii) has to be deleted. Coming to the disallowance of % of average value of investment some proportionate expenditure can be disallowed but in no case it should exceed the amount earned claiming exemption. Hon ble High Court of Punjab Haryana in the case of Pr. Commissioner of Income Tax Vs. Empire Package Pvt. Ltd. 2016 (2) TMI 505 - PUNJAB AND HARYANA HIGH COURT answered the question raised by Revenue in negative wherein the Revenue has raised whether in the facts and circumstances of the case the Hon ble Tribunal is justified in law to hold the disallowance made u/s. 14A r.w. Rule 8D cannot exceed the exempt income in the absence of any such restriction being there in the relevant section or rule . Similar opinion was also expressed by the Hon ble Delhi High Court in the case of Joint Investments Pvt. Ltd. 2015 (3) TMI 155 - DELHI HIGH COURT as clearly held that the proportionate or portion of the tax exempt income surely cannot swallow the entire amount as happened in this case. We are of the opinion that the disallowance under Rule 8D cannot exceed the dividend income earned and claimed as exempt. Therefore the disallowance worked out under Rule 8D(iii) being administrative expenditure is restricted to the amount of dividend earned. AO is directed accordingly. Grounds are partly allowed.

Summary

Issues:
Disallowance under Section 14A of the Income Tax Act.

Analysis:
The appeal was filed against the Commissioner of Income Tax (Appeals)'s order regarding the disallowance under Section 14A of the Income Tax Act. The assessee, engaged in professional advisory and financial consultancy services, filed its return declaring income. The Assessing Officer (AO) disallowed amounts under Rule 8D(2)(ii) and Rule 8D(2)(iii) for administrative expenditure. The Commissioner upheld the disallowance, leading to the appeal.

Before the Commissioner, the assessee argued against the disallowance, stating that borrowed funds were not used for investments and that no expenditure was incurred for earning the minimal dividend income. The Commissioner upheld the disallowance, leading to the appeal. The assessee referred to various case laws to support its contentions.

The Tribunal analyzed the facts and case laws cited. It noted that there was no finding that the assessee incurred any expenditure for earning the dividend income and that there was no diversion of borrowed funds. Consequently, the disallowance under Rule 8D(2)(ii) was deleted. Regarding the disallowance of a proportionate amount of investment value, the Tribunal referred to High Court judgments and held that the disallowance cannot exceed the exempt income earned. The disallowance under Rule 8D(iii) for administrative expenditure was restricted to the amount of dividend earned, following the principles laid down in various judgments.

In conclusion, the Tribunal partly allowed the appeal, directing the Assessing Officer to restrict the disallowance under Section 14A to the actual dividend income earned. The judgment was pronounced on 31st July 2018.