2014 (11) TMI 1274 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Whether investment made in partnership firm does not represent Investment ? - HELD THAT - AO does not appear to have examined the application of the provisions of sec, . 14A by having regard to the accounts of the assessee. We notice that the assessing officer has asked the assessee to work out the disallowance. Assessee excluded investment made in partnership firm as it does not represent Investment . AO did not examine the above said claim of the assessee and also failed to note the inconsistencies in working out the average value of investments. All these discussions would show the half hearted approach adopted by the assessing officer and his carelessness in examining the workings furnished by the assessee vis- -vis the accounts of the assessee company. We also find that the assessee has also failed to explain as to how the provisions of sec. 14A shall not apply to the share income from partnership firms which consisted of 99.5% of its income. The assessee has further canvassed the view that the provisions of sec. 14A r.w. Rule 8D should not be applied to Variable expenses which consisted of expenses incurred directly on the projects undertaken by it. With regard to the Fixed/semi-variable expenses the assessee submitted that the disallowance may be restricted to 5% of the said expenses. Though the assessee did not give any basis for adopting the above said rate of 5% yet the Ld CIT(A) has accepted the same. Both the tax authorities have addressed the issue of disallowance to be made u/s 14A of the Act from the point of view of dividend income only. Further the disallowance has been made with reference to Administrative expenses only. As noticed earlier both the tax authorities have failed to make reference to the accounts of the assessee.Decided against revenue.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act.
2. Applicability of Rule 8D of the Income Tax Rules.
3. Disallowance of administrative expenses.
4. Assessment of disallowance amount.
5. Segregation of expenses into variable and fixed/semi-variable expenses.

Analysis:

Issue 1: Disallowance under section 14A of the Income Tax Act:
The appeal concerned the disallowance of Rs. 1,51,35,812/- under section 14A of the Income Tax Act, which was reduced to Rs. 20,70,770/- by the CIT(A). The assessing officer had asked the assessee to compute the disallowance under section 14A due to holding investments and borrowing funds. The assessee did not make any disallowance initially, but later agreed to the reduced amount. The CIT(A) referred to precedents shifting the burden of proof to the assessing officer, ultimately reducing the disallowance. The revenue challenged this reduction, citing the Delhi Special Bench decision in M/s Chem invest Ltd, but the CIT(A)'s decision was upheld.

Issue 2: Applicability of Rule 8D of the Income Tax Rules:
The assessing officer did not consider Rule 8D(2)(i) and Rule 8D(2)(ii) while computing the disallowance, leading to inconsistencies in the assessment. The assessee's exclusion of certain investments from the average value calculation was not adequately examined. The Special Bench precedent confirmed the applicability of section 14A to share income from partnership firms, which constituted a significant portion of the assessee's income.

Issue 3: Disallowance of administrative expenses:
The disallowance was primarily related to administrative expenses, with the CIT(A) directing a reduction to Rs. 20,70,770/-. The assessee argued for segregation of expenses into variable and fixed/semi-variable categories, with the CIT(A) accepting a 5% disallowance on the latter. The revenue's objection to this decision was dismissed due to the lack of deficiencies in the assessee's method of determining expenses attributable to investments.

Issue 4: Assessment of disallowance amount:
Both tax authorities focused on dividend income while making the disallowance, overlooking a comprehensive examination of the assessee's accounts. The revenue failed to demonstrate any flaws in the assessee's determination of administrative expenses linked to investments, leading to the confirmation of the CIT(A)'s order.

Issue 5: Segregation of expenses into variable and fixed/semi-variable expenses:
The assessee advocated for segregating expenses into variable and fixed/semi-variable categories, proposing a 5% disallowance on the latter. While lacking a basis for the 5% rate, the CIT(A) accepted this approach. However, both tax authorities did not consider expenses beyond administrative costs and did not reference the assessee's accounts, leading to the confirmation of the CIT(A)'s decision.

In conclusion, the appeal filed by the revenue was dismissed, affirming the CIT(A)'s order. The judgment highlighted the importance of a thorough examination of accounts and expenses in determining disallowances under section 14A of the Income Tax Act.