2017 (10) TMI 1095 - AT - Income Tax

Disallowance u/s 14A invoking Rule 8D - Held that - On perusal of the dissatisfaction recorded by the Assessing Officer, we find that in addition to the issue of investment in mutual funds during the year under consideration, he has also referred use of resources and expenditure related to maintain, switching in and out of the funds. In our opinion, by making one factual mistake, other facts for recording the dissatisfaction required in terms of section 14A of the Act cannot be ignored. Accordingly, we reject the contention of the learned counsel challenging the prerequisite of recording the satisfaction under section 14A of the Act. We agree with the contention that disallowance under section 14A of the Act cannot exceed the exempt income earned by the assessee during the year under consideration, in view of the decision of the Hon ble Delhi High Court in the case of Cheminvest Ltd, (2015 (9) TMI 238 - DELHI HIGH COURT) we restrict the disallowance under section 14A of the Act to ₹ 6,62,660/-.

Summary

Issues Involved:
1. Disallowance under Section 14A by invoking Rule 8D.
2. Incorrect presumption of investment in mutual funds.
3. Incorrect suo moto disallowance by the assessee.
4. Calculation of average value of investments.
5. Disallowance exceeding the exempt income.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A by invoking Rule 8D:
The primary issue revolves around the disallowance under Section 14A of the Income Tax Act by invoking Rule 8D. The assessee argued that the Assessing Officer (AO) did not record dissatisfaction with the suo moto disallowance of ?6,021 made by the assessee, which is a prerequisite for invoking Rule 8D. The Tribunal found that the AO did record his dissatisfaction, stating that the assessee must have incurred expenses related to the investment in mutual funds and other related activities, thus justifying the disallowance under Section 14A read with Rule 8D.

2. Incorrect Presumption of Investment in Mutual Funds:
The assessee contended that the AO's dissatisfaction was based on the incorrect presumption that the assessee had invested in mutual funds during the year under consideration. The Tribunal noted that while the AO did mention mutual fund investments, he also referred to the use of resources and expenditure related to maintaining and switching investments. Therefore, the Tribunal rejected the contention that the dissatisfaction was based solely on incorrect facts, stating that one factual mistake does not invalidate the other reasons for dissatisfaction recorded by the AO.

3. Incorrect Suo Moto Disallowance by the Assessee:
The assessee argued that the suo moto disallowance of ?6,021 was correct and should not have been disregarded by the AO. The Tribunal upheld the AO's decision, noting that the AO had valid reasons to be dissatisfied with the assessee's claim and to invoke Rule 8D for a higher disallowance.

4. Calculation of Average Value of Investments:
The assessee contended that the AO should have considered only the investment of ?1,04,19,272, on which exempt income was earned, rather than the average value of all investments. The Tribunal did not specifically address this issue in isolation but focused on the overall correctness of the AO's approach in applying Rule 8D.

5. Disallowance Exceeding the Exempt Income:
The assessee argued that the disallowance under Section 14A should not exceed the exempt income of ?6,62,660, citing the Delhi High Court's decision in Cheminvest Ltd. The Tribunal agreed with this contention, stating that the disallowance cannot exceed the exempt income earned by the assessee. Consequently, the Tribunal restricted the disallowance to ?6,62,660, in line with the precedent set by the Delhi High Court.

Conclusion:
The Tribunal partially allowed the appeal, upholding the AO's application of Rule 8D but restricting the disallowance to the amount of exempt income earned, i.e., ?6,62,660. The decision was pronounced in the open court on 25th October 2017.