2018 (10) TMI 492 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Held that - The same basis cannot be adopted in the year under consideration. If we do so, it will result in the enhancement of the disallowance as made by the AO for which the Tribunal has no power. In the case relied upon by the Ld DR, we note that the total disallowance was made by the AO as per Rule 8D for ₹ 17.54 crores. The disallowance confirmed by the Hon ble ITAT @10% of the total administrative expenditure was within the limit of the disallowance as made by the AO in his assessment order. Therefore, we are reluctant to take any guidance in the given facts and circumstances from the order of Tribunal in the own case of the assessee. Disallowance on account of administrative expenses as per Rule 8D - Held that - AO has treated the sum disallowed by the assessee for ₹ 2,19,585.00 in the income tax return as direct expenses incurred in relation to dividend income under rule 8D(2)(i) of Income Tax Rule. However the action of the AO is not based on any material suggesting that the amount of ₹ 2,19,585.00 is the direct expenditure incurred by the assessee in relation exempted income as specified under rule 8D(2)(i) of Income Tax Rules. Thus we direct to delete the same. Thus, the ground of appeal of the assessee is partly allowed.

Issues Involved:
1. Application of Rule 8D of the Income Tax Rules, 1962.
2. Disallowance under Section 14A of the Income Tax Act, 1961.
3. Computation of disallowance of interest and administrative expenses.
4. Recording of satisfaction by the Assessing Officer (AO).
5. Nexus between borrowed funds and investments.
6. Exclusion of investments in subsidiary companies for disallowance computation.
7. Set-off of suo-moto disallowed expenses.
8. Restriction of disallowance to the extent of exempt income.

Issue-wise Detailed Analysis:

1. Application of Rule 8D of the Income Tax Rules, 1962:
The AO applied Rule 8D for disallowance, leading to an additional disallowance of ?65,26,522/- under Section 14A. The assessee argued that no disallowance was required as their own funds exceeded the investments made in tax-free securities.

2. Disallowance under Section 14A of the Income Tax Act, 1961:
The CIT(A) upheld the AO's action of disallowing ?65,26,522/- under Section 14A r.w.r. 8D. The assessee contended that the AO did not record the required satisfaction regarding the correctness of the disallowance worked by the appellant.

3. Computation of Disallowance of Interest and Administrative Expenses:
The AO computed the disallowance of interest at ?61,50,642/- and administrative expenses at ?3,75,880/-. The assessee argued that no interest disallowance should be made as their own funds exceeded the investments. For administrative expenses, the assessee had already disallowed 1% of total operating expenses, amounting to ?2,19,585/-.

4. Recording of Satisfaction by the Assessing Officer (AO):
The assessee argued that the AO did not record proper satisfaction as required by Section 14A. The CIT(A) observed that the AO discussed the statutory and legal position and stated that the appellant’s argument did not give a correct picture of the claim of expenses.

5. Nexus Between Borrowed Funds and Investments:
The assessee contended that there was no nexus between borrowed funds and investments in tax-free securities. They cited judgments from Hon’ble Gujarat High Court and Hon’ble Bombay High Court to support their claim. The CIT(A) disagreed, stating it was not possible to segregate funds and show that only own funds were used for investments.

6. Exclusion of Investments in Subsidiary Companies for Disallowance Computation:
The assessee argued that investments made in subsidiary companies should be excluded from disallowance computation as these were made for strategic considerations and business expediency, not for earning exempt income.

7. Set-off of Suo-Moto Disallowed Expenses:
The AO made a separate disallowance of ?2,19,585/- which the assessee had already disallowed suo-moto. The CIT(A) confirmed this action. The assessee argued that this amount should be set off against the disallowance worked out by the AO.

8. Restriction of Disallowance to the Extent of Exempt Income:
The assessee argued that the disallowance under Section 14A should be restricted to the extent of exempt income amounting to ?42,23,519/- as claimed in the return of income.

Judgment:

Interest Expenses:
The Tribunal found that the assessee’s own funds exceeded the investments, and thus, no disallowance on account of interest expenses was warranted. The Tribunal relied on its own previous order in the assessee’s case and judgments from higher courts, concluding that no nexus between borrowed funds and investments was established by the AO.

Administrative Expenses:
The Tribunal noted that the AO had made a disallowance of ?3,75,880/- for administrative expenses. It held that the disallowance could not exceed this amount as the Tribunal has no power to enhance the income computed by the AO. The Tribunal confirmed the disallowance of ?3,75,880/- and directed the deletion of the ?2,19,585/- treated as direct expenses by the AO without any supporting material.

Conclusion:
The Tribunal partly allowed the appeal of the assessee, confirming the disallowance of ?3,75,880/- for administrative expenses and deleting the disallowance of ?2,19,585/- for direct expenses. The disallowance of interest expenses was also deleted.

Order Pronounced:
The order was pronounced in open court on 03/10/2018.

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