2018 (8) TMI 1637 - AT - Income Tax

Addition on account of notional expenditure incurred to earn the exempt income by invoking Section 14A read with Rule 8D - Held that -The Tribunal for A.Y. 2011-12 held on being dissatisfied with the assessee s computation of disallowance, embarked on his own computation under rule 8D(2)(iii) at ₹ 5,89,98,005/-. The assessee has not disputed any part of the calculation of such disallowance. This computation of disallowance, having been made in terms of rule 8D(2)(iii), is held to have rightly made. The assessment order making disallowance of ₹ 5.89 crore u/s 14A under the normal provisions of the Act is upheld pro tanto Dispute of computation raised by assessee by filing rectification application which yet have to be decided - Held that - We are remanding back this issue to the file of the Assessing Officer and directing the Assessing Officer to decide the rectification application filed by the assessee u/s. 154 within the reasonable time. Needless to say the assessee be given opportunity of hearing by followings principles of natural justice. Ground No. 1.3 is partly allowed for statistical purpose.

Summary

Issues:
- Addition of notional expenditure under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.
- Disallowance of expenditure for earning exempt income.
- Rectification application for mistake in amount of investments and omission of averaging of investments under Rule 8D.

Issue 1: Addition of Notional Expenditure under Section 14A:
The appeal was filed against an order confirming an addition of ?2,36,57,592 on account of notional expenditure incurred to earn exempt income under Section 14A of the Income Tax Act, 1961. The Assessing Officer calculated the expenditure as per Rule 8D, resulting in the addition. The CIT(A) dismissed the appeal, leading to the matter being brought before the Tribunal.

Issue 2: Disallowance of Expenditure for Earning Exempt Income:
The Assessing Officer observed that the assessee invested a significant amount and earned dividend income during the year. The claimed expenditure of ?12,00,000 was not accepted as the basis for the expenditure was a quotation, not a materialized contract. Consequently, the expenditure for earning the dividend income was calculated as per Rule 8D, resulting in the addition of ?2,36,57,592.

Issue 3: Rectification Application for Mistake in Investments:
The assessee filed a rectification application under Section 154 for a mistake in the amount of investments and the omission of averaging of investments under Rule 8D. The Tribunal noted that the issue of computation was raised by the assessee through the rectification application, which was not disputed by the Revenue. As a result, the Tribunal remanded the matter back to the Assessing Officer for a decision on the rectification application within a reasonable time, allowing the assessee an opportunity of hearing.

In conclusion, the Tribunal partly allowed the appeal for statistical purposes, remanding the issue of rectification application back to the Assessing Officer while dismissing the grounds related to the addition of notional expenditure under Section 14A. The judgment highlighted the importance of proper satisfaction by the Assessing Officer before resorting to Rule 8D for computation of disallowance, emphasizing adherence to the principles of natural justice in decision-making processes.