2019 (12) TMI 1651 - AT - Income Tax

Addition of other expenses u/s. 14A r.w.r. 8D - assessee has explained that it has not used borrowed fund for making investment in share however it has disallowed employee devoted towards the activity of M.F. - AO stated that top management was involved in taking decision and the decision making process was very complicated which required careful analysis from the top management - CIT(A) has dismissed the appeal of the assessee after considering the size of the investment stating that one employee cannot make investment decision - HELD THAT - We observe that disallowance of only 10% of one employee as a cost of administrative expenditure to the amount is not sufficient and appropriate looking to the size of the investment and the quantum of exempt income earned from the investment which was claimed as exempt. We are of the view that involvement of top executives and use of other business office equipment like computer etc. and office premises in respect of investment activities cannot be ruled out, therefore, we are of the view that it will be reasonable to restrict the disallowance under administrative expenditure to the amount of Rs. 4 lacs. Appeal of the assessee is partly allowed.

Summary

Issues involved:
Appeal against addition of other expenses under section 14A r.w.r. 8D for A.Y. 2013-14.

Detailed Analysis:
1. The appeal pertains to the addition of other expenses of Rs. 6,31,171/- under section 14A r.w.r. 8D for the assessment year 2013-14. The assessing officer noted that the assessee had earned exempt income of Rs. 1,01,44,039/- as dividend, which was claimed as exempt income. The officer raised concerns regarding the disallowance under section 14A due to the exempt income earned. The assessee explained that no borrowed funds were used for investments but had disallowed Rs. 45,000/- related to employee expenses for mutual fund activities. However, the assessing officer disagreed with this explanation, emphasizing the strategic decision-making process involved in investment management, requiring top management involvement and careful analysis. Consequently, a disallowance of Rs. 6,31,171/- was made as administrative expenditure incurred for earning exempt income.

2. The assessee appealed to the CIT(A), who upheld the assessing officer's decision based on the size of the investment, stating that one employee alone could not make investment decisions. Upon further review, the ITAT considered the facts and contentions presented. The ITAT observed that the assessee had indeed disallowed Rs. 45,000/- towards an employee's cost handling investment activities. It was noted that investment decisions involving liquidation, retention, or new investments required top management involvement and could not be solely managed by one employee. The ITAT acknowledged the argument that no additional expenditure was incurred to earn the exempt income, and investment activities were primarily online. However, considering the scale of investment and exempt income earned, the ITAT deemed a disallowance of only 10% of one employee's cost insufficient.

3. In light of the above considerations, the ITAT allowed the appeal partly, reducing the disallowance under administrative expenditure to Rs. 4 lakhs. The decision was based on the understanding that top executives' involvement, utilization of business equipment, and office premises for investment activities could not be disregarded. Therefore, the ITAT concluded that restricting the disallowance to Rs. 4 lakhs was reasonable given the circumstances. Consequently, the appeal of the assessee was partly allowed, with the order pronounced on 18-12-2019.