2020 (2) TMI 560 - AT - Income Tax

Addition u/s 14A - exempt dividend income - proximate relationship between the expenditure incurred and the dividend income earned - HELD THAT - As the assessee has not maintained separate books of account or not identified expenses separately towards earning the exempt income, there is no alternative expect estimation. The assessee has estimated the disallowance on the basis of estimation of man hours spent towards the investment in mutual fund activity. The ld. AO has estimated the expenditure for earning exempt income in proportion of exempt income to total income including exempt income. CIT(A) has estimated the disallowance at 5% of exempted income. We find the legislature has approved the similar disallowance for administrative expenses w.e.f. assessment year 2008-09 under Rule 8D(2)(iii) as (0.5%) of average investment in assets yielding exempt income. Hon ble Delhi High Court in the case of ACB India Ltd. Vs. ACIT 2015 (4) TMI 224 - DELHI HIGH COURT and the Special Bench of the Tribunal in ACIT Vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI , has restricted the disallowance towards administrative expenses under Rule 8D(2)(iii) to 0.5% of the assets which yielded exempt income during the year. In our opinion, the estimation of 0.5% of assets which yielded exempted income during the year would be a most reasonable estimate for identifying the administrative expenditure for earning the exempt income. We, accordingly, direct the Assessing Officer to compute the disallowance in view of our above direction, however, the disallowance, if any, computed in this manner should be restricted to disallowance of ₹ 23,55,952/-, which was made by the Assessing Officer in original assessment proceedings - Appeal of assessee is accordingly allowed for statistical purposes.

Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act, 1961.
2. Proximate relationship between expenditure incurred and dividend income earned.
3. Restriction of disallowance to the amount disallowed in original assessment proceedings.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income-tax Act, 1961:
The primary issue revolves around the disallowance of ?37,47,358/- under Section 14A of the Income-tax Act, 1961, which pertains to expenditure incurred in relation to earning exempt income. The CIT(A) held that 5% of the exempt dividend income earned by the appellant during the relevant previous year was disallowable. The appellant contested this, arguing that no expenditure was actually incurred in earning the exempt dividend income and that the disallowance should be restricted to ?5,83,685/- as per their calculation.

2. Proximate relationship between expenditure incurred and dividend income earned:
The appellant argued that the CIT(A) failed to establish any proximate relationship between the expenditure incurred and the dividend income earned. They contended that no actual expenditure was incurred for earning the exempt dividend income. The CIT(A) rejected the appellant's basis of calculation, which included apportioning the cost of running treasury operations, and instead estimated the disallowance at 5% of the dividend income.

3. Restriction of disallowance to the amount disallowed in original assessment proceedings:
The appellant also argued that the disallowance should be restricted to ?23,55,952/-, the amount disallowed in the original assessment proceedings. The CIT(A) stated that once the matter is restored back to the file of the AO for de-novo assessment, the AO’s discretion is not limited to the addition made in the original assessment unless the ITAT specifically mentions it in its order.

Detailed Analysis:

1. Disallowance under Section 14A:
The assessment under Section 143(3) was completed with a total income of ?4,76,80,22,462/-, including a disallowance under Section 14A amounting to ?23,55,952/-. On appeal, the CIT(A) deleted the disallowance of license fees but upheld the disallowance under Section 14A to ?22,14,685/-. The Tribunal later restored the issue of disallowance under Section 14A to the AO for a de-novo assessment. The AO, after providing multiple opportunities to the assessee, computed a disallowance of ?1,01,656/- towards interest expenses and ?1,80,87,686/- as administrative expenses attributable to exempt income.

2. Proximate relationship between expenditure and dividend income:
The CIT(A) deleted the addition of ?1,01,656/- out of interest payment but estimated 5% of the dividend income as administrative expenses. The appellant provided calculations for the suo motu disallowance of ?5,83,685/-, which included the cost of treasury operations. However, the CIT(A) found these calculations unverifiable and instead estimated the disallowance at 5% of the dividend income, amounting to ?37,47,358/-.

3. Restriction of disallowance:
The appellant argued that the AO's disallowance exceeded the amount disallowed in the original assessment proceedings. The CIT(A) and the Tribunal found that the estimation of disallowance should be based on a reasonable basis. The Tribunal noted that the legislature has approved a similar disallowance for administrative expenses at 0.5% of the average investment in assets yielding exempt income from the assessment year 2008-09 onwards. The Tribunal directed the AO to compute the disallowance at 0.5% of the assets yielding exempt income, restricting it to the original disallowance amount of ?23,55,952/-.

Conclusion:
The Tribunal allowed the appeal of the assessee for statistical purposes, directing the AO to compute the disallowance based on the Tribunal's directions, ensuring it does not exceed ?23,55,952/-. The order was pronounced in the open court on 17th January 2020.

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