2020 (10) TMI 835 - AT - Income Tax

Disallowance u/s 14A - addition by passing order u/s 154 - addition in respect of the administrative expenses incurred for earning of tax exempt income which include dividend income earned from investment in wholly subsidiary company and Agriculture Income - assessee did not make suo motu disallowance of expenditure in respect of the aforesaid tax exempt income earned by the assessee - Whether there were sufficient funds available with the assessee company for the purposes of making the investment ? - as per assessee investments made were old investment and that the same were out of the own surplus funds of the assessee - HELD THAT - AO has applied Rule 8D(2)(iii) directly without considering the submissions of the assessee that the assessee has not incurred any expenditure in this respect and that all the investment were strategic investments for business purposes of the assessee. As per the provisions of section 14A of the I.T. Act, before proceeding to calculate disallowance under Rule 8D(2)(iii), the Assessing Officer was supposed to consider the submissions of the assessee and examine the accounts of the assessee and was required to record his findings / reasoning that he is not satisfied with the plea / submissions of the assessee. However, no such exercise has been done by the AO in this case. It is to be noted that out of the total dividend income of ₹ 7,45,55,286/-, an amount of ₹ 7,45,49,286/- has been earned by the assessee from old investments in wholly owned subsidiary company M/s Saraswati Sugar Mills Ltd. The remaining of only ₹ 6,000/- has been earned from other company M/s Reliance Industries Ltd. However, the fact is also on the file that the assessee has maintained / managed not only old strategic investments for business purpose in wholly owned subsidiary / sister concern but also made old investments in other companies. Considering the submissions of the assessee that not much effort has been made by the assessee to manage the old investments and further considering that the major chunk of the dividend amount was earned from strategic investments made in the subsidiaries, in our view, a lump sum disallowance of ₹ 5 lacs will be reasonable on account of administrative expenses incurred for management of old investments. The disallowance made on account of administrative expenses is accordingly restricted to ₹ 5 lacs only. - Decided partly in favour of assessee.

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Sufficiency of funds for making investments.
3. Applicability of the Supreme Court judgment in PCIT vs. Sintex Industries.
4. Consideration of facts and submissions during the hearing.
5. Right to amend grounds of appeal.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The primary issue in this appeal concerns the disallowance of ?79,05,111/- under Section 14A of the Income Tax Act, 1961, read with Rule 8D(2)(iii) of the Income Tax Rules, 1962. The disallowance pertains to administrative expenses incurred for earning tax-exempt income of ?7,53,76,223/-, which includes dividend income from investments in subsidiary companies and agricultural income. The assessee did not make a suo motu disallowance of expenditure for the tax-exempt income. The Assessing Officer (AO) made this disallowance without considering the assessee's submission that no expenditure was incurred for earning the dividend income from wholly-owned subsidiaries and that the agricultural income was supported by a separate profit and loss account.

2. Sufficiency of Funds for Making Investments:
The assessee argued that there were sufficient own funds available for making the investments, and hence, no disallowance under Section 14A was warranted. The investments included old investments made in various companies, with significant investments in Saraswati Sugar Mills Limited and Isgec Hitachi Zosen Limited. The assessee contended that these investments were made from the company's own funds and retained earnings, not borrowed funds. The AO acknowledged that the investments were old and did not make any disallowance of interest expenditure under Rule 8D(2)(ii). However, the AO still made a disallowance for administrative expenses under Rule 8D(2)(iii).

3. Applicability of the Supreme Court Judgment in PCIT vs. Sintex Industries:
The assessee cited the Supreme Court judgment in PCIT vs. Sintex Industries, which held that no disallowance under Section 14A is warranted when there are surplus funds. The assessee argued that since the investments were made from surplus funds and retained earnings, the disallowance under Section 14A should not apply. The AO and CIT(A) did not consider this judgment in their decisions.

4. Consideration of Facts and Submissions During the Hearing:
The assessee claimed that the CIT(A) did not properly consider the facts and submissions made during the hearing. The AO applied Rule 8D(2)(iii) directly without recording any findings or reasoning that he was not satisfied with the assessee's submissions. The Tribunal noted that the AO did not examine the assessee's accounts or record his dissatisfaction with the assessee's claim that no expenditure was incurred for earning the tax-exempt income.

5. Right to Amend Grounds of Appeal:
The assessee reserved the right to add or amend the grounds of appeal before the appeal is finally heard or disposed of. This issue is procedural and does not impact the substantive decision of the Tribunal.

Conclusion:
The Tribunal found that the AO did not properly consider the assessee's submissions or examine the accounts before making the disallowance under Rule 8D(2)(iii). Given that the major portion of the dividend income was from strategic investments in wholly-owned subsidiaries, the Tribunal deemed a lump sum disallowance of ?5 lakhs as reasonable for administrative expenses. The appeal was thus partly allowed, reducing the disallowance to ?5 lakhs.

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