2021 (3) TMI 321 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - suo moto disallowance - HELD THAT - In Assessment Year 2008-09 in 2019 (12) TMI 1457 - ITAT DELHI on the issue of disallowance u/s 14A the Co-ordinate Bench of the Tribunal had considered the issue of disallowance and remitted the issue back to the file of the Assessing Officer to work out of the disallowance by calculating average investments under Rule 8D(2)(ii)/(iii) by taking only those investments which have actually yielded dividend income during the relevant year and also directed that if the same exceeded the dividend income then to restrict the same to the extent of exempt income only. Disallowance u/s 14A of the Act had again restored the issue to the file of the AO with the direction to ascertain the investment which have yielded dividend income and to consider only those investments for computing the average value of investments. Therefore, on identical facts and with consent of both the parties, we deem it appropriate to restore this issue also to the file of the AO with a direction to include only those investments which have yielded dividend income for computing the average value of investments for the purpose of computing the amount of disallowance u/s 14A - AO is directed to offer reasonable opportunity to the assessee to present its case before proceeding to re-compute the disallowance. Since this ground also relates to the ground raised in the Department s appeal, the Department s ground also stands restored to the file of the AO with similar directions. Disallowance of non-compliance charges amounting paid to National Stock Exchange - HELD THAT - As seen that the Ld. Authorized Representative has given a detailed break up and description of the various amounts constituting the impugned total amount and has vehemently argued that these penalties and fines levied by National Stock Exchange were more in the nature of regulatory/disciplinary fees and were not in the nature of any penalty levied for violation of any law. The fact remains that the submissions regarding the actual nature of fines and penalties levied by NSE were not explained before the Lower Authorities. The fact also remains that in the tax audit report, the auditor, in his own wisdom, has stated that this amount was liable to be disallowed and added back to the income of the assessee. In our considered opinion, interest of substantive justice would be met if the assessee is allowed an opportunity to explain and establish before the Assessing Officer as to how these amounts do not fall within the mischief of section 37(1) of the Act. We, accordingly, restore this issue to the file of the Assessing Officer with a direction to examine the matter afresh after giving proper opportunity to the assessee to present its case. Thus, Ground allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of ?35,18,803/- paid to the National Stock Exchange (NSE) as fines and penalties.
2. Disallowance of ?1,93,79,583/- under Section 14A of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of ?35,18,803/- Paid to NSE:

The assessee challenged the disallowance of ?35,18,803/- made by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT (A)], arguing that these charges paid to NSE were not in the nature of fines and penalties for the violation of law but were compensatory. The assessee is a member of the NSE and engaged in providing securities broking services. The charges were levied for procedural non-compliances such as non-settlement of dues, non-maintenance of KYC documents, and other regulatory breaches. The assessee contended that these were routine and compensatory in nature, not penal, and hence deductible under Section 37(1) of the Income Tax Act.

The Tribunal noted that the submissions regarding the nature of these fines and penalties were not adequately explained before the lower authorities. Despite the tax auditor's report suggesting disallowance, the Tribunal found it appropriate to allow the assessee an opportunity to explain and establish the nature of these charges before the AO. Consequently, the issue was restored to the AO for fresh examination, providing the assessee an opportunity to present its case.

2. Disallowance of ?1,93,79,583/- Under Section 14A:

The assessee had received dividend income of ?4,14,800/- and had suo moto made a disallowance of ?1,83,55,525/- under Section 14A. The AO, however, computed the disallowance at ?3,77,35,108/-, making an additional disallowance of ?1,93,79,583/-. On appeal, the CIT (A) restricted the disallowance to the suo moto amount made by the assessee, agreeing that disallowance under Section 14A cannot exceed the exempt income.

The assessee argued that the suo moto disallowance was incorrectly computed and that only those investments which yielded exempt income should be considered under Rule 8D. The Tribunal observed that similar issues in the assessee's cases for previous years had been decided in favor of the assessee, directing the AO to compute disallowance only for investments yielding exempt income.

Following the precedent, the Tribunal restored the issue to the AO with directions to consider only those investments which yielded dividend income for computing the average value of investments under Rule 8D. The AO was directed to offer a reasonable opportunity to the assessee to present its case before re-computing the disallowance.

Conclusion:

Both the assessee's and the Department's appeals were allowed for statistical purposes. The issue of disallowance of ?35,18,803/- paid to NSE was remitted back to the AO for fresh examination. Similarly, the issue of disallowance under Section 14A was also restored to the AO with directions to consider only those investments which yielded dividend income for computing the average value of investments. The AO was instructed to provide the assessee with a reasonable opportunity to present its case.