2019 (8) TMI 928 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - assessee disallowed aforesaid expenses by applying 0.5% of the average investments - HELD THAT - The onus is on the assessee to bring on record, the details of modus operandi adopted by it for making investments, arranging its affairs and managing investments which ought to be firstly brought by assessee before the AO in discharge of primary onus as is cast on the assessee. No such details are filed before us to prove that the assessee discharged its primary onus. The assessee rather made suo motu disallowance of expenditure u/s 14A, accepting and admitting applicability of Section 14A. It applied of its own 0.5% of average investments for making disallowance u/s 14A of the 1961 Act by invoking Rule 8D(2)(iii) of the 1962 Rules, towards administrative expenses. Now, to resile from its own admitted position at this stage is not warranted. AO on its part has duly recorded satisfaction albeit cryptic. AO is directed to make disallowance of expenditure u/s 14A in accordance with our aforesaid directions. The assessee is directed to file complete details and modus operandi for making and managing investments to that effect before the AO in denovo proceedings. AO shall grant proper and adequate opportunity of being heard to the assessee in denovo assessment proceedings and the evidences submitted by the assessee in its defence shall be admitted by the AO. We direct the AO make to disallowance of expenditure u/s. 14A in accordance with our aforesaid directions.

Summary

Issues Involved:
1. Disallowance of expenses under Section 14A read with Rule 8D.
2. Applicability of Section 14A and Rule 8D to interest expenses and administrative expenses.
3. Recording of satisfaction by the Assessing Officer (AO) before invoking Section 14A.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses under Section 14A read with Rule 8D:

The Revenue's appeal (ITA No. 3092/Mum/2016) for AY 2012-13 challenged the CIT(A)'s decision to restrict the disallowance to ?4,59,998 as opposed to ?1,54,62,223 made by the AO under Section 14A read with Rule 8D. The AO had observed that the assessee, an NBFC engaged in investment business, earned ?83,48,000 as exempt dividend income and had voluntarily disallowed ?4,59,998 under Section 14A. The AO made additional disallowances based on bank charges and interest expenses, totaling ?1,54,62,223. The CIT(A) reduced this disallowance, citing the assessee's interest-free funds and net interest expenses, and excluded investments in properties and growth mutual funds from the disallowance calculation.

2. Applicability of Section 14A and Rule 8D to Interest Expenses and Administrative Expenses:

The assessee argued that investments generating taxable income, such as debentures and growth mutual funds, should not be included in the disallowance calculation. The CIT(A) accepted this argument, noting that the assessee's interest-free funds exceeded its long-term investments in shares. The CIT(A) also accepted the assessee's claim that net interest expenses should be considered for disallowance purposes, based on the Bombay High Court's decision in Reliance Utilities and Power Ltd. The Tribunal agreed with the CIT(A) that only investments capable of yielding exempt income should be considered for disallowance under Section 14A.

3. Recording of Satisfaction by the AO before Invoking Section 14A:

The Tribunal noted that the AO had recorded satisfaction, albeit briefly, before invoking Section 14A. The assessee had voluntarily disallowed ?4,59,998 under Section 14A, applying 0.5% of average investments for administrative expenses. The Tribunal held that the AO's satisfaction was sufficient and directed the AO to make disallowance of expenditure under Section 14A in accordance with the Tribunal's directions. The assessee was directed to provide complete details and modus operandi for managing investments during the de novo proceedings.

Conclusion:

The Tribunal allowed the Revenue's appeal for statistical purposes, directing the AO to re-evaluate the disallowance under Section 14A following the Tribunal's guidelines. The same directions applied to the assessee's appeal (ITA No. 7061/Mum/2017) for AY 2013-14, which was also allowed for statistical purposes. The AO was instructed to provide an adequate opportunity for the assessee to present evidence during the fresh adjudication.

Order Pronounced:

The appeals of both the Revenue and the assessee were allowed for statistical purposes, with the AO directed to re-assess the disallowance under Section 14A in accordance with the Tribunal's instructions.