2021 (9) TMI 66 - AT - Income Tax

Disallowance u/s 14A r.w.s 8D - whether the assessing officer was under the obligation to reject the basis adopted by the assessee for disallowance of expenses against the exempted income before resorting to the provisions of Section 14A r.w.r. 8D? - HELD THAT - As decided in own case 2020 (12) TMI 1112 - ITAT AHMEDABAD assessee that investments which have been made through the involvement of the PMS providers should be ignored while working out the disallowance of the expenses under Rule 8D of Income Tax Rule. As because such investments were made on the advice of the PMS and for this purpose PMS was compensated by the assessee by way of fees paid to them which has already been disallowed by the assessee - further consideration of such investments for the purpose of disallowance of expenses u/s 14A r.w.r. 8D would lead to double disallowance which is unwanted under the provisions of law. As pertinent to note that the diminution in the value of investments should also be considered while working out the disallowance to be made under the provisions of Section 14A read with Rule 8D of Income Tax Rules - As because such benefit was extended by the AO in the assessment framed under Section 143(3) for the Assessment Year 2007-08 which was not disputed by the assessee. There being no change in the facts and circumstances or the provisions of law, in our considered view the principles of consistency should be followed by the Revenue - we direct the authorities below to extend the benefit of the assessee on account of diminution in the value of investments while working out the disallowance to be made under the provisions of Section 14A read with Rule 8D of Income Tax Rules - Appeal of the assessee is partly allowed.

Summary

Issues:
1. Disallowance under section 14A r.w. Rule 8D of Income-Tax Rules.

Analysis:
The appeal was filed by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)-8, Ahmedabad, related to the assessment order passed under section 143(3) of the Income Tax Act, 1961 for the Assessment Year 2015-2016. The primary issue raised by the assessee was regarding the disallowance of ?7,92,784 under section 14A r.w. Rule 8D of Income-Tax Rules. The assessee, a private limited company engaged in manufacturing, had shown dividend income of ?2,01,19,449 exempted u/s 10(34) of the Act. The AO found that the disallowance made by the assessee was not in line with Rule 8D and thus calculated a disallowance of ?7,92,784 after adjusting the amount already disallowed by the assessee.

The Ld. CIT(A) confirmed the AO's order, leading the assessee to appeal before the Tribunal. The assessee contended that in a previous case involving identical facts, the Tribunal had partly allowed the appeal. The Tribunal noted that the AO was not satisfied with the basis adopted by the assessee for the disallowance, as it was based on estimation without rational submission. The Tribunal held that the primary onus was on the assessee to justify the stand taken. Additionally, the Tribunal found that the AO was not required to establish the nexus between the expenditure and the exempted income, as the assessee had admitted incurring some expenditure for earning exempted income.

The Tribunal also highlighted that the working of the assessee for computing expenses based on 0.5% of dividend income was faulty, leading to the application of Rule 8D by the AO. The Tribunal dismissed the appeal, emphasizing the importance of consistency in applying principles of law. It directed the authorities to consider diminution in the value of investments while working out the disallowance under Section 14A r.w. Rule 8D. The Tribunal partially allowed the appeal, as the facts were similar to the earlier case where the appeal was partly allowed.

In conclusion, the Tribunal partly allowed the appeal of the assessee, considering the previous decision involving identical facts and emphasizing the need for consistency in applying legal principles.

Judgment:
The Tribunal partly allowed the appeal of the assessee, emphasizing the importance of consistency in applying legal principles and directing the consideration of diminution in the value of investments while working out the disallowance under Section 14A r.w. Rule 8D of Income Tax Rules.