2018 (2) TMI 1215 - HC - Income Tax

Addition u/s 14A - Tribunal found that the assessee had surplus tax free funds thus there was no question of disallowance of any interest income and even after completing the format, the disallowance cannot exceed the total administrative expenditure incurred by the assessee - Held that - We are fully in agreement with the view of the Tribunal. Under no circumstances, can the Assessing Officer attribute administrative expenses for earning tax free income in excess of the total administrative expenditure incurred by the assessee. If it is a case where Assessing Officer disputes, question and disallow the very declaration of the assessee regarding total administrative expenditure, the issue can be somewhat different. Nevertheless, when the Assessing Officer has in the present case did not disturb the assessee s declaration that total administrative expenses incurred by the assessee for all its activities was ₹ 30 lakhs, there was no question of disallowing administrative expenses to the tune of ₹ 60 lakhs under Section 14A of the Act with the aid of Rule 8D of the Rules. Tax Appeal is, therefore, dismissed. - Decided against revenue

Summary

Issues:
1. Disallowance of expenses under Section 14A of the Income Tax Act.
2. Disallowance of administrative expenses while computing book profit under Section 115JB of the Income Tax Act.

Analysis:
1. The first issue revolves around the disallowance of expenses under Section 14A of the Income Tax Act. The Assessing Officer had disallowed certain interest expenditure and inflated administrative expenses for earning tax-exempt income. The Tribunal, however, found that the assessee had surplus tax-free funds, thus negating the need for disallowance of interest income. Regarding administrative expenses, the Tribunal noted that the total administrative expenses were &8377; 30 lakhs, out of which the assessee had offered &8377; 10 lakhs for earning income covered under Section 14A. The Assessing Officer, using Rule 8D, calculated a disallowance of &8377; 60 lakhs. The Tribunal held that the disallowance cannot exceed the total administrative expenditure incurred by the assessee. As the Assessing Officer did not dispute the total administrative expenses declared by the assessee, the disallowance of &8377; 60 lakhs was deemed excessive and not in accordance with the law.

2. The second issue pertains to the disallowance of administrative expenses while computing book profit under Section 115JB of the Income Tax Act. The Tribunal found that the Assessing Officer's disallowance of administrative expenses to the tune of &8377; 60 lakhs under Section 14A was unwarranted. As the total administrative expenses declared by the assessee were &8377; 30 lakhs, the disallowance could not exceed this amount. The Tribunal's decision was based on the principle that the Assessing Officer cannot attribute administrative expenses for earning tax-free income in excess of the total administrative expenditure incurred by the assessee. Therefore, the Tax Appeal challenging the disallowance of expenses under Section 14A of the Act was dismissed by the High Court, affirming the Tribunal's decision.