2016 (11) TMI 591 - AT - Income Tax

Disallowance u/s.14A r.w.r. 8D - Held that - The disallowance under Rule 8D(2)(iii) of Income Tax Rules, 1962 read with Section 14A of the Act can be made having regard to the accounts of the assessee as per the mandate of Section 14A(2) of the Act and it cannot be applied straight-away without having regard to the accounts of the assessee. The assessee has not submitted any details of the expenses incurred and claimed that no expenditure has been incurred which could be attributable to the earning of exempt income. The assessee has incurred expenses of ₹ 8.31 crores towards personnel costs and ₹ 10.05 crores towards administrative expenses which needed to be scrutinized by the authorities to compute indirect expenses which were incurred for earning the exempt income for which onus is on the assessee to submit the details before the authorities. In our considered view, the matter needs to be set aside and restored to the file of the A.O. for de-novo determination of the administrative and other indirect expenses to be disallowed u/s 14A of the Act and accordingly we set aside matter to the file of the A.O. who is directed to work out the reasonable disallowance towards indirect expenses incurred for earning exempt income having regards to the accounts of the assessee . - Decided in favour of assessee for statistical purpose.

Summary

Issues:
Disallowance under section 14A of the Income Tax Act, 1961 - Whether expenses incurred by the assessee are attributable to earning exempt income.

Analysis:

Issue 1: Disallowance under section 14A of the Income Tax Act, 1961

The appeal was filed by the assessee company against the appellate order confirming the disallowance under section 14A amounting to ?9,26,019 as per Rule 8D. The AO observed that the assessee earned dividend income claimed as exempt under section 10 of the Act. The AO applied section 14A read with Rule 8D and disallowed an amount of ?10,10,669. The assessee contended that the investment activity was incidental to its main business and no borrowings were made for investments, thus no interest expenditure could be attributed to earning exempt income. The AO, however, held that the disallowance was warranted, relying on the decision of the Hon'ble Bombay High Court. The CIT(A) deleted a part of the disallowance but confirmed ?9,26,018 on account of administrative and indirect costs. The Tribunal observed that the disallowance under Rule 8D(2)(iii) can be made based on the accounts of the assessee and directed the AO to determine reasonable disallowance towards indirect expenses incurred for earning exempt income. The matter was set aside and restored to the AO for de novo determination of the disallowance.

Issue 2: Attributability of Expenses to Earning Exempt Income

The Tribunal noted that the assessee had not submitted details of expenses incurred for earning exempt income, and the onus was on the assessee to provide such information. The Tribunal directed the assessee to produce all necessary details before the AO for computing the disallowance of indirect and administrative expenses under section 14A. The AO was instructed to determine the issue de novo after considering the Tribunal orders and giving the assessee a reasonable opportunity to be heard. The Tribunal allowed the appeal for statistical purposes.

In conclusion, the Tribunal's judgment focused on the attribution of expenses to earning exempt income under section 14A of the Income Tax Act, 1961. The Tribunal directed the AO to re-examine the matter based on the assessee's accounts and relevant details to determine a reasonable disallowance towards indirect expenses incurred for earning exempt income. The decision highlighted the importance of providing necessary information and complying with the principles of natural justice in tax assessments.