2018 (1) TMI 934 - AT - Income Tax

Addition u/s 14A(2) r.w. Rule 8D(i) - Held that - Keeping in view the judgment of the Hon ble High Court of Bombay in the case of Commissioner of Income-tax vs. HDFC Bank Ltd. (2014 (8) TMI 119 - BOMBAY HIGH COURT), the A.O prior to arriving at the aforesaid conclusion, ought to have verified the availability of the owned funds with the assessee. We thus restore the issue pertaining to disallowance made by the A.O under Sec. 14A(2) r.w Rule 8D(2)(ii) to the file of the A.O for fresh adjudication. The A.O is directed to readjudicate the issue as regards the disallowance under Sec. 14A r.w Rule 8D(2)(ii) keeping in view the judgment of the Hon‟ble High Court of Bombay in the case of HDFC Bank Ltd. (supra). The Ground of appeal No. 1(ii)(b) & (c) are allowed for statistical purposes. Disallowance of the demat charges u/s 14A(2) r.w Rule 8D(2)(i) - Held that - We find that though the assessee had assailed before us the validity of the disallowance of the demat charges of ₹ 93,692/- made by the A.O, but however, a perusal of the order of the CIT(A) reveals that the assessee on the contrary had agreed before him that the same were the direct expenses incurred in relation to its exempt income. We thus are of the considered view that in the backdrop of the aforesaid concession of the assessee, the grievance of the assessee as regards the sustaining of the disallowance by the CIT(A) does not survive. - Decided against assessee. Restoring the disallowance u/s 14A(2) r.w. Rule 8D(2)(iii) to the file of the A.O for fresh adjudication - Held that - Held that - CIT(A) keeping in view the claim of the assessee that the administrative expenses to the extent of ₹ 13,53,850/- were not incurred in relation to earning of exempt income, and no expense was incurred for earning of the exempt income, had thus rightly directed the A.O to make necessary verifications as regards the said claim of the assessee and readjudicate the disallowance under Sec. 14A r.w Rule 8D(2)(iii). We are of the considered view that no infirmity emerges from the aforesaid observations of the CIT(A). We thus finding no reason to dislodge the view arrived at by the CIT(A), therefore, uphold the same. - Decided against revenue

Summary

Issues Involved:
1. Disallowance of proportionate finance charges under Section 14A read with Rule 8D.
2. Disallowance of demat charges under Section 14A read with Rule 8D.
3. Restoration of the disallowance of administrative expenses to the file of the Assessing Officer (A.O) for verification.

Issue-wise Detailed Analysis:

1. Disallowance of Proportionate Finance Charges under Section 14A read with Rule 8D:

The assessee challenged the CIT(A)'s decision to confirm the addition of ?44,63,736/- made by the A.O as disallowance of proportionate finance charges related to exempt income under Section 14A read with Rule 8D. The A.O had observed that the assessee received dividend income of ?5,46,27,122/- but did not apportion any expenditure towards earning this exempt income. Consequently, the A.O applied Section 14A read with Rule 8D and disallowed ?4,20,64,448/- in total, which included ?44,63,736/- as finance charges. The CIT(A) upheld the A.O’s decision, noting that the assessee did not maintain separate books of accounts and used mixed funds for investments. The Tribunal, however, found merit in the assessee's argument, referencing the Bombay High Court's judgment in the HDFC Bank Ltd. case, which necessitates verifying the availability of owned funds before disallowing interest expenses. Thus, the Tribunal restored the issue to the A.O for fresh adjudication, directing the A.O to re-evaluate the disallowance in light of the HDFC Bank Ltd. judgment.

2. Disallowance of Demat Charges under Section 14A read with Rule 8D:

The assessee also contested the disallowance of ?93,692/- as demat charges by the A.O under Section 14A read with Rule 8D. The CIT(A) upheld this disallowance, noting that the assessee had conceded these charges were directly related to earning exempt income. The Tribunal found no reason to overturn the CIT(A)'s decision, as the assessee did not provide any compelling evidence to dispute the CIT(A)'s findings. Consequently, the Tribunal upheld the disallowance of demat charges.

3. Restoration of Disallowance of Administrative Expenses to the A.O for Verification:

The Revenue appealed against the CIT(A)'s decision to restore the disallowance of ?3,75,07,020/- made under Section 14A read with Rule 8D(2)(iii) to the A.O for fresh adjudication. The CIT(A) had directed the A.O to verify the assessee's claim that administrative expenses of ?13,53,850/- were not related to earning exempt income and were incurred exclusively for the business of trading in fabric. The CIT(A) further instructed that if expenses were found to be indivisible, only a proportionate amount should be disallowed. The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the directions given for verification and readjudication of the administrative expenses.

Conclusion:

The Tribunal partly allowed the assessee's appeal for statistical purposes by restoring the issue of disallowance of finance charges to the A.O for fresh adjudication, upheld the disallowance of demat charges, and dismissed the Revenue's appeal regarding the restoration of administrative expenses to the A.O for verification. The final order was pronounced in the open court on 17.01.2018.