2019 (6) TMI 236 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - suo motu disallowance made by the assessee itself - HELD THAT - In the case of mutual funds, administrative and managerial expenses are factored in the investments itself. In such a scenario, the explanation offered by the assessee for non applicability of rule 8D(2)(iii) for rigid disallowance appears to be in congruity with market practice. Accordingly, we do not find it a fit case for resorting to double disallowance of similar expenditure taking shelter of Rule 8D(2)(iii) of the IT Rules. It will be pertinent here to note that a bare reading of Section 14A of the Act suggests that its applicability is not automatic. It is hedged by conditions prescribed therein. Section 14A inheres in it the concept of reasonableness. The formidable amount of expenditure as computed by the AO cannot be said to be attributable to tax free income generated from separately administered mutual funds by applying a straight jacket formula embodied in Rule 8D(2)(iii) of the IT Rules. Thus, we find considerable merit in the plea of the assessee for no additional disallowance over and above suo motu disallowance made by the assessee itself in this regard. Hence, we are disposed to adjudicate the issue in favour of the assessee. Thus, the order of the CIT(A) sustaining the disallowance u/s 14A deserves to be vacated. - Decided in favour of assessee.

Summary

Issues Involved:
- Disallowance for administrative expenses under section 14A of the Income Tax Act.
- Applicability of Rule 8D(2)(iii) for disallowance of administrative expenditure.
- Reasonableness of disallowance and application of Section 14A.

Analysis:
1. Disallowance for Administrative Expenses under Section 14A:
The appeals were filed against the orders of the Commissioner of Income Tax (Appeals) concerning assessment orders passed by the Assessing Officer under section 143(3) of the Income Tax Act for the assessment years 2013-14 and 2014-15. The main ground of appeal was the disallowance under section 14A of the Act. The assessee contested the disallowance, arguing that the exempt income from mutual funds did not warrant the application of Rule 8D(2)(iii) for administrative expenses disallowance.

2. Applicability of Rule 8D(2)(iii) for Disallowance of Administrative Expenditure:
The assessee received dividend income from mutual funds and had suo moto disallowed an amount of ?10,000 as expenses attributable to exempt income. The contention was that since the exempt income was generated from mutual fund investments without separate administrative expenses, Rule 8D(2)(iii) should not be invoked for further disallowance. The Tribunal noted that mutual fund investments involve expert supervision with administrative and managerial expenses factored into the investments themselves, unlike direct share investments. The Tribunal found the assessee's explanation for non-applicability of Rule 8D(2)(iii) to be in line with market practice, ruling in favor of the assessee.

3. Reasonableness of Disallowance and Application of Section 14A:
The Tribunal emphasized that Section 14A of the Act requires a reasonable approach and does not mandate automatic applicability. It highlighted that the large amount of expenditure computed by the Assessing Officer was not directly attributable to tax-free income from mutual funds. The Tribunal found merit in the assessee's argument that no additional disallowance was necessary beyond the suo moto disallowance made by the assessee. Consequently, the Tribunal allowed the appeals for both assessment years, vacating the disallowance under section 14A of the Act.

4. Conclusion:
The Tribunal allowed both appeals of the assessee, emphasizing the unique nature of mutual fund investments and the reasonableness of disallowance under section 14A. The orders of the Commissioner of Income Tax (Appeals) sustaining the disallowance were vacated, providing relief to the assessee in both cases.