2019 (4) TMI 354 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - voluntary disallowance by assessee - recording of satisfaction - HELD THAT - Out of the remaining expenses of ₹ 10.90 lacs, the tax-payer further voluntarily disallowed an amount of ₹ 5.45 lacs as an expenditure incurred in relation to earning of an exempt income within contemplation of Section 14A, which was 50% of the expenses claimed by the tax-payer. Revenue went ahead and disallowed ₹ 2.41 crores u/s 14A albeit the tax-payer never claimed expenses of that magnitude. AO did not recorded any satisfaction as to what is basis of disallowing expenses to the tune of ₹ 2.41 crores u/s 14A while the total expenses debited to Profit and Loss Account (net of voluntary disallowance of ₹ 4.13 lacs) was only ₹ 10.90 lacs. Based on peculiar factual matrix of the case, the said appeal was decided by tribunal vide its order dated 08.05.2018 wherein suo moto disallowance of 50% of the total expenses offered for disallowance u/s 14 by the tax-payer voluntary in the return of income filed with the Revenue was accepted by the tribunal, while the factual matrix in assessee s case is entirely different as we have discussed in details in preceding para s of this order. Based on our detailed discussions in the preceding para s of this order, we are restoring the issue back to the file of the AO for fresh adjudication of disallowance of expenditure incurred in relation to the earning of an income which does not form part of the total income having regard to the accounts of the assessee. The assessee is directed to produce before the AO for verification its working of computing disallowance of expenses u/s 14A being incurred in relation to earning of an exempt income having regard to accounts of the assessee. The assessee is also directed to produce before the AO complete details as to how its investments portfolio in securities is managed and handled. AO shall give proper and adequate opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law. The evidences/explanations submitted by the assessee shall be admitted by the AO and shall be adjudicated on merits in accordance with law. This disposes of ground no. 1 to 7 raised by the assessee in its memo of appeal filed with tribunal

Issues Involved:
1. Disallowance under section 14A of the Income-tax Act read with Rule 8D of the Income-tax Rules, 1962.
2. Non-recording of satisfaction by AO regarding the incorrectness of the claim of the appellant.
3. Disallowance of administrative expenses towards dividend income.
4. Restriction of disallowance to actual expenditure incurred to earn exempt income.
5. Exclusion of investments not yielding exempt income during the year in disallowance computation.
6. Exclusion of strategic investments from the computation of total investments.
7. Limitation of disallowance to a reasonable percentage of dividend income towards administrative expenses.

Detailed Analysis:

1. Disallowance under section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962:
The assessee challenged the disallowance under section 14A, arguing that it had already made a suo-moto disallowance of ?26,83,723. However, the AO applied Rule 8D, resulting in a higher disallowance of ?46,93,278. The tribunal noted that the AO observed the assessee had substantial investments requiring management expenses, and thus, invoked Rule 8D correctly. The tribunal referenced previous years' decisions where Rule 8D was applicable and necessary for computing disallowance.

2. Non-recording of satisfaction by AO regarding the incorrectness of the claim of the appellant:
The assessee argued that the AO did not record satisfaction as required under section 14A(2). The tribunal acknowledged that satisfaction must be recorded before invoking Rule 8D, referencing the Supreme Court's decision in Godrej and Boyce Manufacturing Company Limited v. DCIT. The tribunal found that the AO had recorded satisfaction, observing the need for substantial management expenses for investments.

3. Disallowance of administrative expenses towards dividend income:
The AO disallowed administrative expenses at 0.5% of the average value of investments. The tribunal noted that the assessee had already disallowed ?26,83,723, including administrative expenses. The tribunal referenced previous tribunal orders directing the AO to compute the total expenditure incurred for earning exempt income and to restrict disallowance to actual expenses incurred.

4. Restriction of disallowance to actual expenditure incurred to earn exempt income:
The assessee contended that disallowance should be limited to actual expenditure. The tribunal directed the AO to recompute disallowance, ensuring it does not exceed the total expenditure claimed by the assessee for composite activities resulting in taxable and non-taxable income.

5. Exclusion of investments not yielding exempt income during the year in disallowance computation:
The assessee argued that only investments yielding exempt income should be considered. The tribunal agreed, referencing the Special Bench decision in ACIT v. Vireet Investment Private Limited, directing the AO to consider only those investments which yielded exempt income during the year.

6. Exclusion of strategic investments from the computation of total investments:
The assessee claimed strategic investments should be excluded. The tribunal, referencing the Supreme Court decision in Maxopp Investment Limited v. CIT, rejected this argument, stating strategic investments should be included in the computation.

7. Limitation of disallowance to a reasonable percentage of dividend income towards administrative expenses:
The assessee suggested limiting disallowance to a reasonable percentage of dividend income. The tribunal did not specifically address this but directed the AO to recompute disallowance based on actual expenses incurred.

Conclusion:
The tribunal set aside the issue to the AO for fresh adjudication, directing the AO to verify the assessee's working of disallowance and ensure it is based on actual expenses incurred. The AO was instructed to consider only investments yielding exempt income and to include strategic investments in the computation. The tribunal emphasized the need for the AO to provide proper and adequate opportunity for the assessee to present its case. The appeal was allowed for statistical purposes.

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