2017 (12) TMI 408 - AT - Income Tax

Addition u/s 14A - Held that - The AO has not pointed out any defect in the computation made by the assessee company and as such, provisions contained u/s 14A read with Rule 8D are not attracted. Because sub-section (2) & (3) of section 14A with Rule 8D of the Rules has only prescribed a formula for determination of an expenditure to earn the income which does not form part of the total income under the Act, which can only be invoked if the AO is not satisfied with the claim of the assessee. Furthermore, CIT (A) erred in sustaining the disallowance of ₹ 68,433/- by restricting the same to 10% of the exempt income even despite agreeing with the assessee company that no satisfaction has been recorded by the AO that nil expenses has been incurred to earn tax free dividend income rather proceeded to sustain the addition of ₹ 68,433/- on the basis of surmises and guesswork which is not sustainable. In the given circumstances, the contentions raised by ld. DR are not sustainable. Appeal filed by the Revenue challenging to restrict the disallowance u/s 14A read with Rule 8D from ₹ 43,67,640/- to ₹ 68,433/- is dismissed being without merit.

Summary

Issues:
Appeal by Revenue challenging disallowance under section 14A of the Income Tax Act, 1961. Cross objections by assessee challenging the same disallowance.

Analysis:
1. The Revenue appealed against the order restricting disallowance under section 14A of the Income Tax Act, 1961. The Revenue contended that the Commissioner of Income-tax (Appeals) erred in not appreciating the application of Rule 8D while making the disallowance. The Revenue also argued that the disallowance was wrongly restricted to a lower amount. The Objector, M/s. DLF Info City Developers, filed cross objections challenging the same order, claiming that the disallowance was confirmed erroneously.

2. The Assessing Officer disallowed a specific amount under section 14A, which was later restricted by the Commissioner of Income-tax (Appeals). Both the Revenue and the assessee appealed the decision. The Tribunal heard arguments from both sides and examined the relevant documents and orders.

3. The Tribunal noted that the assessee earned dividend income, but the Assessing Officer did not provide a computation for the disallowance made. The Revenue argued that the disallowance was correctly calculated based on the accounts rendered by the assessee, while the assessee contended that no expenses were incurred to earn the dividend income.

4. The Tribunal observed that the assessee had substantial reserve and surplus funds, indicating that investments yielding exempt income were made from interest-free funds. Citing relevant case law, the Tribunal emphasized that when non-interest bearing funds exceed investments in tax-free securities, no disallowance should be made under section 14A.

5. Referring to legal precedents, including decisions by the Supreme Court and the Delhi High Court, the Tribunal concluded that the Revenue's arguments were not sustainable. The Tribunal found that the provisions of section 14A read with Rule 8D were not attracted as the Assessing Officer did not point out any defects in the assessee's computations.

6. Consequently, the Tribunal dismissed the Revenue's appeal to restrict the disallowance and allowed the assessee's cross objections, ordering the deletion of the disallowance amount. The judgment was pronounced on December 7, 2017.