2021 (1) TMI 601 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Whether no nexus between expenses debited to profit loss account and exempt income earned for the year? - HELD THAT - Tribunal has considered the arguments of the assessee that unless there is a direct nexus between the expenses incurred and exempt income, no disallowance can be made u/s.14A of the Act by invoking Rule 8D of the Rules and held that since provisions of Section 14A is a deemed fiction where direct nexus between expenditure debited to the profit loss account and exempt income is not necessary. Therefore, we reject the arguments taken by the assessee that there is no nexus between expenses debited to profit loss account and exempt income earned for the year. Unless AO records satisfaction having regard to books of accounts that suo moto disallowance or no disallowance made by the assessee is not correct and he cannot proceed to compute disallowance u/s.14A - As in MAXOPP INVESTMENT LTD. 2018 (3) TMI 805 - SUPREME COURT has considered the issue of satisfaction in the above case and held that where the AO is not satisfied with suo moto disallowance made by the assessee having regard to books of accounts that suo moto disallowance made by the assessee is not correct, he cannot invoke provisions of Rule 8D of the Rules. In this case on perusal of facts available on record, we find that the AO has recorded satisfaction as required u/s.14A(2) of the Act and applied Rule 8D(2) of the Rules to compute disallowance. Therefore the arguments taken by the assessee that no satisfaction is recorded by the AO is rejected. Disallowance computed by the AO and modified by the ld.CIT(A) on the basis of revised computation filed by the assessee during appellate proceedings - Once Rule 8D(2) of the Rules is applicable for computation of disallowance then the AO has to take net investments recorded in the books of accounts which yield exempt income for the purpose of determining disallowance under Rule 8D(2)(iii) of the Rules. The ld.CIT(A) has considered revised computation filed by the assessee and has directed the AO to exclude investments which do not yield exempt income for the purpose of computation of average value of investments and delete excess disallowance made under Rule 8D(2)(iii) of the Rules. We therefore are of the opinion that there is no error in the findings recorded by the CIT(A) to confirm / modify disallowance of expenditure in relation to exempt income u/s.14A r.w.rule 8D(2)(ii) of the Rules. Hence, we are inclined to uphold findings of the CIT(A) and dismiss the appeal filed by the assessee.

Summary

Issues:
Disallowance under section 14A read with Rule 8D(2)(iii) of the Income-tax Rules for assessment years 2013-14 & 2014-15.

Analysis:
1. The appeals were filed against orders of the Commissioner of Income Tax (Appeals) for assessment years 2013-14 & 2014-15, which were heard together due to identical facts and common issues.

2. The assessee contested the disallowance made under section 14A read with Rule 8D(2)(iii) of the Rules. The Assessing Officer (AO) computed disallowance of expenses related to exempt income despite the assessee's claim of no expenditure for earning dividend income.

3. The CIT(A) deleted the additions towards interest expenditure but directed the AO to verify the computation for disallowance under Rule 8D(2)(iii) of the Rules. The assessee challenged this decision before the ITAT.

4. The ITAT considered the arguments regarding the nexus between expenses and exempt income. It rejected the assessee's claim that no disallowance can be made without a direct nexus, citing Section 14A as a deemed fiction where such nexus is not necessary.

5. The ITAT also addressed the requirement of AO satisfaction for invoking Rule 8D, noting that the AO had recorded satisfaction as per Section 14A(2) and applied Rule 8D(2) to compute disallowance. The ITAT upheld the CIT(A)'s decision on the disallowance of expenditure related to exempt income.

6. Referring to a previous case, the ITAT dismissed the appeals for both assessment years, stating that the issues were identical to a prior case. The appeals were dismissed on 17th December, 2020 in Chennai.

This detailed analysis covers the key legal arguments, decisions, and outcomes of the judgment regarding the disallowance under section 14A read with Rule 8D(2)(iii) of the Income-tax Rules for the assessment years 2013-14 & 2014-15.