2021 (3) TMI 215 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - As per AO assessee has earned exempt income during the year and has not made any corresponding disallowance of expenses for earning of the exempt income - HELD THAT - PMS fee has been paid to three funds as stated above and the investments made has yielded taxable income. The payment of to Motilal Oswal PMS Account was Rs. ₹ 11,125/- and the assessee has earned short term capital gain of ₹ 24,614/- from the securities dealt through this fund. Similarly, assessee has paid PMS fee to Trust Investment Equity of ₹ 2,06,018/- and claimed the same against short term capital gain of ₹ 1,53,995/- which is chargeable to tax. Likewise, assessee paid PMS fee to Trust Investment Debt of ₹ 1,27,812/- which has yielded taxable income of ₹ 6,08,676/- and thus all these expenses were incurred in relation to earning of taxable income and we find merit in the contentions of the learned counsel for the assessee that these cannot be disallowed as direct expenses relating to earning of exempt income. We are inclined to set aside the finding of learned CIT(A) on this issue and direct the Assessing Officer to delete the disallowance Disallowance being 0.5%of the average investments - Assessing Officer has simply rejected the submissions of the assessee without pointing out as to how the said submissions are wrong and thus has not recorded any satisfaction before invoking the provisions of section 14A r.w.r. 8D(2)(iii). The assessee has filed Income Expenditure account before the Assessing Officer and each expense debited therein has been explained as having been incurred in relation to earning of taxable income. Assessing Officer has not controverted the submissions of the assessee but has simply invoked the provisions of Section 14A of the Act r.w.r 8D of the Rules without recording any satisfaction as to how the books of account of the assessee are not correct. So far as the disallowance under Section 14A of the Act r.w.r 8D(2)(iii) is concerned, we are not in agreement with the conclusion drawn by learned CIT(A) on this issue. The case of the assessee finds support from the decision of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. vs CIT 2018 (3) TMI 805 - SUPREME COURT . We, therefore, are inclined to set aside the order of learned CIT(A) following the ratio laid down in the above decision and direct the Assessing Officer to delete the addition made u/s 14A of the Act. Appeal of the assessee is allowed.

Summary

Issues:
Disallowance under Section 14A of the Act r.w.r 8D of the Rules.

Analysis:
The only issue raised in this appeal pertains to the disallowance of ?10,21,142/- under Section 14A of the Act r.w.r 8D of the Rules. The Assessing Officer disallowed this sum as the assessee earned exempt income during the year without corresponding expenses disallowance. The disallowance comprised of direct expenses related to earning exempt income and 0.5% of the average investments. The CIT(A) upheld the disallowance. The Tribunal noted that the direct expenses were incurred in relation to earning taxable income and thus cannot be disallowed as expenses relating to earning exempt income. Therefore, the Tribunal directed the Assessing Officer to delete the disallowance of ?3,44,955/-.

Regarding the disallowance of ?6,76,188/- (0.5% of average investments), the Assessing Officer did not provide a satisfactory explanation for rejecting the assessee's submissions. The Tribunal found that each expense debited in the Income & Expenditure account was explained as being incurred in relation to earning taxable income. The Assessing Officer invoked Section 14A of the Act r.w.r 8D of the Rules without demonstrating any discrepancies in the assessee's books of account. Citing the decision in Maxopp Investment Ltd. vs CIT, the Tribunal set aside the CIT(A)'s order and directed the Assessing Officer to delete the addition made under Section 14A of the Act.

In conclusion, the appeal of the assessee was allowed by the Tribunal, emphasizing that expenses incurred in relation to earning taxable income cannot be disallowed under Section 14A of the Act. The Tribunal directed the Assessing Officer to delete both the disallowance of direct expenses and the addition made under Section 14A of the Act, as the expenses were found to be linked to the generation of taxable income.