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2019 (10) TMI 1069 - AT - Income TaxDisallowance u/s 14A r.w. Rule 8D - HELD THAT - In the present case the AO was not satisfied with the claim of the assessee. The AO, having regard to the accounts of the assessee has arrived at a finding that it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. Only thereafter, the AO has made the disallowance u/s 14A r.w. Rule 8D. Therefore, we are not inclined to agree with the contentions of the Ld. counsel that no satisfaction has been recorded by the AO in an objective manner. In MAXOPP INVESTMENT LTD. 2018 (3) TMI 805 - SUPREME COURT held if expenditure in incurred on earning dividend income, that much of the expenditure which is attributable to dividend income has to be disallowed and cannot be treated as business expenditure. In those cases, where shares are held as stock-in-trade, main purpose is to trade in those shares and earn profits therefrom, in the process, certain dividend is also earned, though incidentally, which is also an income. This triggers applicability of section 14A which is based on theory of apportionment of expenditure between taxable and non-taxable income. Therefore, to that extent, expenditure incurred in acquiring those shares will have to be apportioned In Vireet Investment (P.) Ltd. 2017 (6) TMI 1124 - ITAT DELHI held that only those investments are to be considered for computing average value of investment which yielded exempt income during the year. We are of the considered view that the ratio laid down in the above decision is squarely applicable in the instant case. Therefore, we set aside the order of the Ld. CIT(A) for the impugned assessment years and restore the matter to the file of the AO to make a de novo order after following the ratio laid down in Vireet Investment (P.) Ltd.(supra). We direct the assessee to file the relevant documents/evidence before the AO. Needless to say, the AO would give a reasonable opportunity of being heard to the assessee before finalizing the order.
Issues Involved:
1. Disallowance under Section 14A read with Rule 8D. 2. Restriction of disallowance to the extent of exempt income. 3. Application of Rule 8D preconditions. 4. Disallowance on investments held as stock-in-trade. 5. Disallowance on strategic investments. 6. Disallowance on investments that did not yield exempt income during the year. 7. Calculation errors in disallowance computation. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D: The primary issue revolves around the disallowance made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962. The AO computed disallowance for various assessment years (AY 2009-10, AY 2011-12, and AY 2012-13), citing that the assessee had not attributed any expenses incurred to earn exempt income. The AO followed the judgment of the Hon’ble Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd. v. DCIT and computed the disallowance based on Rule 8D. 2. Restriction of disallowance to the extent of exempt income: The Commissioner of Income Tax (Appeals) [CIT(A)] directed the AO to restrict the disallowance to the extent of exempt income, following the Hon’ble Delhi High Court's decision in Joint Venture Pvt. Ltd. v. CIT. The revenue contested this restriction, arguing that the disallowance computed by the AO should be confirmed as per Section 14A read with Rule 8D. The Tribunal noted that the CIT(A) had followed the principle that disallowance under Section 14A cannot exceed the exempt income. 3. Application of Rule 8D Preconditions: The assessee argued that before invoking Rule 8D, the AO must record dissatisfaction with the suo motu disallowance made by the assessee in an objective manner. The Tribunal referred to the decisions in Godrej & Boyce Mfg. Co. Ltd. and found that the AO had indeed recorded dissatisfaction with the assessee's claim, thus justifying the application of Rule 8D. 4. Disallowance on Investments Held as Stock-in-Trade: The assessee contended that no disallowance should be made under Section 14A for investments held as stock-in-trade. The Tribunal referred to the Hon’ble Supreme Court's decision in Maxopp Investment Ltd. v. CIT, which held that even if shares are held as stock-in-trade, the expenditure incurred in earning dividend income must be apportioned and disallowed under Section 14A. 5. Disallowance on Strategic Investments: The assessee argued that no disallowance should be made for strategic investments. However, the Tribunal did not specifically address this issue separately, implying that the general principles of Section 14A and Rule 8D would apply. 6. Disallowance on Investments That Did Not Yield Exempt Income During the Year: The assessee argued that only those investments that yielded exempt income during the year should be considered for computing the average value of investments under Rule 8D. The Tribunal referred to the Special Bench decision in ACIT v. Vireet Investment (P.) Ltd., which supported this view. Consequently, the Tribunal directed the AO to follow this principle in the de novo order. 7. Calculation Errors in Disallowance Computation: For AY 2012-13, the assessee pointed out calculation errors in the AO's computation of disallowance under Rule 8D. The Tribunal acknowledged these errors and directed the AO to correct them while making the de novo order. Conclusion: The Tribunal set aside the CIT(A)'s order for the impugned assessment years and restored the matter to the AO for a de novo order, following the principles laid down in Vireet Investment (P.) Ltd. The Tribunal directed the assessee to provide relevant documents/evidence before the AO and instructed the AO to give a reasonable opportunity of being heard to the assessee before finalizing the order. The appeals were partly allowed for statistical purposes.
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