2021 (4) TMI 948 - AT - Income Tax

Disallowance of expenses in relation to exempt income u/s.14A - assessee submitted AO has erred in disallowance of expenses u/s.14A without recording satisfaction as required under sub-section 2 of section 14A of the Act, having regard to the books of accounts of the assessee that disallowance if any made by the assessee is incorrect - HELD THAT - We find that the AO has computed disallowance having regard to books of accounts of the assessee that although the assessee has made investment in shares and securities which yield exempt income but no disallowance was made in relation to expenses relatable to such exempt income. Therefore, we are of the considered view that said finding of the AO constitute satisfaction as required u/s.14A(2) of the Act and hence, in absence of any express provision for recording satisfaction in particular form by the statute then disallowance computed by the AO by invoking Rule 8D(2) of the IT Rules, 1962 itself depicts that AO was not satisfied with the explanation of the assessee and hence there is no merit in the arguments taken by the ld.AR of the assessee on the issue of satisfaction. Accordingly, we reject the same. Disallowance computed by the AO under Rule 8D(2) - Interest disallowance under Rule 8D(2)(ii) - As gone through the explanation furnished by the assessee in light of schedule of financial charges appeared in the financial statement and find that interest expenditure incurred for the year are relatable to specific loans borrowed for acquisition of assets, interest paid on Client Margin Money and interest paid u/s.234C of the Act. Further, there is no specific interest has been paid on any loan which has been used for investing in dividend yielding shares or securities. Therefore, unless the AO makes out a case that interest bearing funds have been used for making investments in shares and securities which yield income, no interest disallowance can be made under Rule 8D(2) of the IT Rules, 1962. Therefore, we direct the AO to delete additions made towards disallowance of interest under Rule 8D(2)(ii) of IT Rules 1962. Disallowance of expenses under Rule 8D(2)(iii) - We find that the ITAT, Special Bench of Delhi in the case of ACIT vs. Vireet Investments (P) Ltd., 2017 (6) TMI 1124 - ITAT DELHI had considered an identical issue and held that while computing average value of investments only those investments which yield exempt income for the year should be considered - for computing disallowance under Rule 8D(2)(iii), those investments which yield exempt income only needs to be considered. The assessee has submitted details, as per which, out of total investments of ₹ 5,06,26,240/- a sum of ₹ 1,20,000/- was only yielding exempt income. Therefore, we set aside the issue to the file of the AO and direct him to recompute disallowance in light of our discussions herein above and also in light of submissions made by the assessee that only a sum of ₹ 1,20,000/- is yielding exempt income. Disallowance of membership fee paid to MCX Exchange Ltd . - nature of expenditure - Revenue or capital expenditure - Claim of depreciation - HELD THAT - There is no error in the findings recorded by the AO and confirmed by the ld.CIT(A) in disallowance of deduction claimed towards membership fee paid to MCX Exchange Ltd., as revenue expenditure. Insofar as, the case law relied upon by the ld.AR for the assessee in the case of S. Venkatasubramaniam 2006 (9) TMI 148 - MADRAS HIGH COURT as held that membership fees paid to any stock exchange is revenue expenditure, but because the Hon ble Supreme Court has taken a different view in later judgment in the case of M/s. Techno Shares and Stocks Ltd., vs. CIT 2010 (9) TMI 6 - SUPREME COURT and held that membership fees paid to any stock exchange is an intangible asset and eligible for depreciation u/s.32(1)(ii) of the Act, we are of the considered view that case law relied upon by the ld.AR for the assessee has no application because said judgment was rendered before the decision of Hon ble Supreme Court in the case of M/s. Techno Shares and Stocks Ltd., vs. CIT. Therefore, considering the facts and circumstances of the case and also by following the decision of Hon ble Supreme Court in the case of M/s. Techno Shares and Stocks Ltd, we are of the considered view that there is no error in the findings recorded by the authorities below to disallow deduction claimed towards membership fee paid to MCX Exchange Ltd., as revenue expenditure and further allowing depreciation as intangible asset u/s.32(1)(ii) of the Act. Accordingly, we reject the ground taken by the assessee.

Summary

Issues Involved:
1. Disallowance of expenses in relation to exempt income u/s.14A of the Act.
2. Disallowance of membership fee paid to MCX Exchange Ltd.

Issue 1: Disallowance of expenses in relation to exempt income u/s.14A of the Act:

The appellant contested the disallowance of expenses u/s.14A, arguing that the Assessing Officer (AO) erred without recording satisfaction and that no expenditure was incurred for earning exempt income. The appellant claimed that interest disallowance was unjustified as borrowed funds were not used for investments generating exempt income. The appellant also challenged the disallowance of other expenses, suggesting a lower disallowance amount based on investments yielding exempt income. The dispute centered on whether the AO had properly invoked Rule 8D to compute the disallowance. The Tribunal rejected the appellant's arguments, finding that the AO's actions constituted satisfaction under the Act. However, the Tribunal directed the AO to delete the interest disallowance as specific interest-bearing funds were not used for exempt income investments. Regarding other expenses, the Tribunal instructed the AO to reconsider the disallowance based only on investments yielding exempt income.

Issue 2: Disallowance of membership fee paid to MCX Exchange Ltd:

The AO disallowed the membership fee as capital expenditure, considering it an enduring benefit to the assessee. The appellant argued that the fee was a revenue expenditure for facility use, citing a decision by the Madras High Court. The Tribunal noted that membership fees grant trading rights and are intangible assets, aligning with Section 32(1)(ii) of the Act. Relying on a Supreme Court ruling, the Tribunal upheld the disallowance, rejecting the appellant's reliance on the Madras High Court judgment. The Tribunal concluded that the membership fee constituted an intangible asset, not a revenue expenditure, and allowed depreciation under the Act. Consequently, the Tribunal dismissed the appellant's appeal on this issue.

In conclusion, the Tribunal partly allowed the appeal for statistical purposes, ruling in favor of the appellant on the disallowance of interest expenses but upholding the disallowance of the membership fee paid to MCX Exchange Ltd. The judgment was pronounced on 21st April 2021 in Chennai by the Appellate Tribunal ITAT Chennai.