2021 (7) TMI 149 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - suo moto disallowance - AO found that the disallowance made by the assessee was not in pursuance to the provisions of section 14A read with rule 8D - HELD THAT - AO has not recorded any satisfaction for making disallowance u/s 14A we noticed that AO at Page 5 of the assessment order has clearly stated that assessee has not maintained any record to demonstrate that no administrative expenditure has been incurred for the purpose of earning exempt income - AO has also cited instances of administrative expenditure such as the review of investment, monitoring of the activities of the company in which the assessee company has made substantial investment by the director of the assessee company and the employees of the assessee company etc.- salary paid by the assessee company to those employee and the director who have devoted their time towards investment activities have not been utilised exclusively for the purpose of the business of the company. No merit in the ground of appeal of the assessee that no satisfaction has been recorded by the AO before making disallowance u/s 14A - after perusal of the information on record filed by the assessee we observe that assessee has made investment in equity share of listed company's debentures, bond units of mutual fund etc. and all these have been made through portfolio management consultant who has provided full fledge services in that respect - assessee had suo-motu disallowed an amount u/s 14A - looking to the quantum of exempt income and investment made by the assessee it will be appropriate to restrict the disallowance out of administrative expenditure to the amount - Therefore, appeal of the assessee is partly allowed. Disallowance as per the clause (f) to Explanation-1 of Sec. 115JB for addition u/s 14A r.w.r. 8D - HELD THAT - Disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction in the case of CIT Vs. Jayshree Tea Industries Ltd. 2014 (11) TMI 1169 - CALCUTTA HIGH COURT . As independently. In this regard, we note that there is no mechanism/ manner given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the expenses with respect to the exempted income - we feel that adhoc disallowance will serve the justice to the Revenue and assessee to avoid the multiplicity of the proceedings and unnecessary litigation - we direct the AO to make the disallowance of 1% of the exempted income as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. We also feel to bring this fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. We note that there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1% of the exempted income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act. Thus the ground of appeal of the assessee is partly allowed.

Issues Involved:
1. Invocation of Rule 8D without recording dissatisfaction.
2. Disallowance under Section 14A read with Rule 8D.
3. Partial confirmation of disallowance under Section 14A read with Rule 8D.
4. Non-following of binding decisions regarding credit of owned funds.
5. Disallowance under Section 14A for calculating book profit under Section 115JB.
6. Orders passed without proper appreciation of facts and breach of Principles of Natural Justice.
7. Levy of interest under Sections 234A/B/C.

Detailed Analysis:

1. Invocation of Rule 8D without Recording Dissatisfaction:
The assessee argued that the Assessing Officer (AO) invoked Rule 8D without recording any dissatisfaction with the assessee's claim. The Income Tax Appellate Tribunal (ITAT) noted that the AO found the disallowance made by the assessee under Section 14A inadequate and thus invoked Rule 8D, which was justified as the AO recorded dissatisfaction with the assessee's claim.

2. Disallowance under Section 14A read with Rule 8D:
The assessee had made a disallowance of ?67,416 against exempt income under Section 14A. However, the AO, dissatisfied with this amount, invoked Rule 8D and computed a disallowance of ?20,96,334. The CIT(A) partly allowed the appeal, reducing the disallowance to ?10,25,016 subject to verification. The ITAT upheld the AO's action, noting that the assessee had not adequately demonstrated the expenses related to exempt income and had not challenged the applicability of Section 14A read with Rule 8D.

3. Partial Confirmation of Disallowance under Section 14A read with Rule 8D:
The ITAT found that the assessee's argument that it had already disallowed ?42,89,298 against exempt income was not valid, as these expenses were claimed against capital gains and not business income. The ITAT upheld the AO's and CIT(A)'s actions but restricted the disallowance to ?3,00,000, following its own previous decisions in similar cases.

4. Non-following of Binding Decisions Regarding Credit of Owned Funds:
The assessee contended that the CIT(A) did not follow binding decisions of the Hon'ble Gujarat High Court, which allow credit of owned funds while computing disallowance under Section 14A read with Rule 8D. The ITAT did not find merit in this ground as the assessee failed to provide sufficient evidence that only direct expenses were disallowed.

5. Disallowance under Section 14A for Calculating Book Profit under Section 115JB:
The AO added the disallowance made under Section 14A while computing book profit under Section 115JB. The ITAT referred to the Special Bench decision in ACIT vs. Vireet Investment Pvt. Ltd., which held that disallowances under Section 14A read with Rule 8D should not be added while computing book profit under Section 115JB. The ITAT directed the AO to make an ad-hoc disallowance of 1% of the exempted income for calculating book profit under Section 115JB.

6. Orders Passed Without Proper Appreciation of Facts and Breach of Principles of Natural Justice:
The assessee claimed that the lower authorities did not properly appreciate the facts and ignored submissions, thus breaching the Principles of Natural Justice. The ITAT did not find substantial evidence supporting this claim and upheld the lower authorities' orders.

7. Levy of Interest under Sections 234A/B/C:
The assessee contested the levy of interest under Sections 234A/B/C. The ITAT did not provide a detailed discussion on this issue, implying that the levy of interest was upheld as per the statutory provisions.

Conclusion:
The ITAT partly allowed the appeal, restricting the disallowance under Section 14A read with Rule 8D to ?3,00,000 and directing an ad-hoc disallowance of 1% of the exempted income for calculating book profit under Section 115JB. Other grounds raised by the assessee were not found to have merit.

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