2017 (9) TMI 805 - AT - Income Tax

Addition u/section 14A r.w.r. 8D - disallowance of expenditure incurred to earn exempt income - computation of claim - Held that - In this case, the assessee has various investments including investments in subsidiaries and also it is a fact that the details filed by the assessee does not throw any light to prove that dividend income is earned form shares held by way of amalgamation only. We find that the Hon ble Delhi High Court in the case of Joint Investments P Ltd vs CIT (2015 (3) TMI 155 - DELHI HIGH COURT) held that the window for disallowance is indicated in section 14A and is only to the extent of disallowing expenditure incurred by the assessee in relation to tax exempt income. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. Also in the case of CIT vs Holcim India Pvt Ltd (2014 (9) TMI 434 - DELHI HIGH COURT) has held that there can be no disallowance u/s 14A in the absence of exempt income. The rationale behind these judgments is that the amount of disallowance cannot exceed exempt income. In this case we find that the assessee has earned exempt income of ₹ 24,138, whereas the AO disallowed an amount of Rs ₹ 3,36,28,000. Therefore, considering the facts and circumstances of the case and also following the ratios of the case laws discussed above, we are of the view that disallowance u/s 14A cannot exceed the exempt income. Hence, we direct the AO to restrict disallowance u/s 14A to the extent of exempt income earned by the assessee. - Decided partly in favour of assessee.

Summary

Issues:
Disallowance of expenditure u/s 14A r.w.r. 8D of IT Rules, 1962.

Analysis:

Issue 1: Disallowance of expenditure u/s 14A r.w.r. 8D of IT Rules, 1962

The case involved an appeal filed by the assessee against the order of CIT(A)-16, Mumbai for the assessment year 2011-12 regarding the disallowance of expenditure under section 14A of the Income Tax Act. The Assessing Officer (AO) observed that the assessee held investments, income from which did not form part of the total income, and thus, should have made a disallowance of expenditure related to such income. The AO invoked Rule 8D to calculate the disallowance at 0.5% of the average value of investments. The CIT(A) upheld the AO's decision, emphasizing that the assessee failed to prove that no expenses were incurred in maintaining the investments. The assessee contended that the investments were strategic and not for earning dividend income, especially as most companies did not declare dividends. The Tribunal noted that the AO must compute disallowance as per the prescribed formula under Rule 8D, even if the assessee claims no expenditure was incurred to earn exempt income. The Tribunal rejected the assessee's arguments, stating that the financial statements showed various investments, including in subsidiary companies, and that the claim of no expenditure was not substantiated. The Tribunal also ruled that the disallowance under section 14A cannot exceed the exempt income earned, directing the AO to restrict the disallowance to the extent of the exempt income.

In conclusion, the Tribunal partly allowed the appeal, emphasizing that the disallowance under section 14A should not exceed the exempt income earned by the assessee. The judgment highlighted the mandatory nature of disallowance under section 14A r.w.r. 8D and the requirement for the AO to follow the prescribed formula, even if the assessee claims no expenditure was incurred to earn exempt income. The decision also underscored the importance of substantiating claims regarding strategic investments and the need for disallowance not to exceed the exempt income earned.

This detailed analysis of the judgment provides a comprehensive understanding of the issues involved and the Tribunal's decision regarding the disallowance of expenditure under section 14A r.w.r. 8D of the IT Rules, 1962.