2019 (3) TMI 699 - AT - Income Tax

Disallowance u/s.14A read with Rule 8D - contention of assessee that AO has recorded no proper satisfaction - HELD THAT - No force in this contention because the AO has categorically recorded that the assessee has incurred various kinds of expenses in its Profit and loss account. The investments have been made in various schemes of mutual funds. It is not possible that the assessee has not incurred any expenditure in connection with such investments and earnings of such dividend income. As this investment is substantial assessee has used its resources to monitor and oversee the progress of such schemes of mutual funds. Therefore it cannot be said that no expenditure is attributable to such activities . In view of the above extracted portion of the assessment order, it is clearly discernible that the AO recorded proper satisfaction before making disallowance u/s.14A. Computing of disallowance - whether investments which did not yield any tax free income during the year should have been excluded while computing the disallowance? - HELD THAT - The Hon ble Delhi High Court in ACB India Ltd. vs. CIT (2015 (4) TMI 224 - DELHI HIGH COURT has held that the average value of investments, for the purposes of Rule 8D(2)(iii), should be confined to those securities in respect of which exempt income is earned and not the total investments. Similar view has been taken in the case of ACIT vs. Vireet Investments (P) Ltd. 2017 (6) TMI 1124 - ITAT DELHI holding that only those investments should be considered for computing average value of investments which yield exempt income during the year - we set aside the impugned order to this extent and remit the matter to the file of Assessing Officer for re-computing the disallowance under Rule 8D(2)(iii) - Assessee appeal is partly allowed for statistical purposes.

Summary

Issues involved:
1. Disallowance of expenses under section 14A of the Income-tax Act read with Rule 8D for assessment years 2012-13 & 2014-15.

Analysis:
A.Y. 2012-13:
The primary issue in this appeal was the disallowance of expenses amounting to &8377; 27,53,812/- under section 14A of the Income-tax Act read with Rule 8D. The Assessing Officer (AO) made the disallowance after the assessee earned dividend income of &8377; 4,73,95,865/- from mutual funds, claiming it as exempt u/s.10(35) of the Act. The AO rejected the assessee's contentions and proceeded to make the disallowance under Rule 8D(2)(iii) at &8377; 32,12,212/-. The issue raised was whether the AO properly recorded satisfaction before making the disallowance. The tribunal found that the AO did record proper satisfaction, as evidenced by the assessment order's content. However, the tribunal held that only investments yielding exempt income should be considered for computing the average value of investments under Rule 8D(2)(iii), following precedents set by the Delhi High Court and the Special Bench of the Tribunal. The matter was remitted back to the AO for re-computation, allowing the assessee a hearing opportunity in fresh proceedings. The appeal was partly allowed for statistical purposes.

A.Y. 2014-15:
In this assessment year, the assessee made a suo motu disallowance of &8377; 15.00 lakh u/s.14A. The AO computed disallowance at &8377; 68,91,377/- under Rule 8D(2)(iii) after reducing the voluntary amount offered by the assessee. The issue was whether the AO had recorded proper satisfaction before invoking section 14A. The tribunal found that the AO had recorded ample satisfaction in the assessment order. The AO proceeded to make the disallowance based on the possibility of various expenses incurred in making investments and earning exempted income. Similar to the previous year, the tribunal directed the AO to re-compute the disallowance under Rule 8D(2)(iii) by considering only investments yielding exempt income. The assessee was granted a hearing opportunity in this regard, and the appeal was partly allowed for statistical purposes.

In both cases, the tribunal emphasized the importance of proper satisfaction by the AO before making disallowances under section 14A and Rule 8D. The decisions were based on legal precedents and aimed at ensuring a fair computation of disallowances related to exempt income.