2014 (5) TMI 768 - AT - Income Tax

Disallowance of expenses u/s 14A r.w. Rule 8D of the Act Held that - Following assessee s own case for the previous assessment year, it has been held that, revenue has not brought out any evidence to prove that the assessee has engaged any specialized staff either for making the investments in shares and mutual funds or for looking after such activities of the assessee, or to prove that any expenditure has in fact been specifically incurred for making such investments or for carrying out such activities - no disallowance in terms of S.14A is called for, merely based on the presumption that certain expenditure must have been incurred, by resorting to estimation of such expenditure - For bringing any interest expenditure claimed by the assessee under the ambit of Rule 8D(2)(ii) the AO has to show that the interest is not directly attributable to any particular income or receipt - there was merit in the contention of the assessee that the investments have been made from out of the interest-free funds available with it - no disallowance out of the interest expenditure is called for in terms of S.14A of the Act, by estimating such interest expenditure as attributable to the amounts of investment - there was no merit in the appeal of the department Decided against Revenue.

Summary

Issues:

1. Disallowance of Expenditure under S.14A r.w.r. 8D of the Act.
2. Assessment of expenditure incurred for earning dividend income.
3. Estimation of disallowance by Assessing Officer.
4. CIT(A)'s decision on restricting the disallowance.
5. Appeal by Revenue challenging CIT(A)'s decision.
6. Tribunal's consideration of the issue in a related appeal.
7. Tribunal's decision on the disallowance of expenditure.

Analysis:

1. Disallowance of Expenditure under S.14A r.w.r. 8D of the Act:
The case involved a cooperative bank with interest-bearing loans and dividend income. The Assessing Officer estimated disallowance of expenditure under S.14A due to the volume of investments. The CIT(A) acknowledged that some costs are attributable to investments, leading to a restricted disallowance of Rs.1 lakh.

2. Assessment of expenditure incurred for earning dividend income:
The Assessing Officer noted interest-bearing loans and sought details of expenditure for earning dividend income. The assessee claimed no specific expenditure for this purpose, stating regular business costs covered it. The Assessing Officer estimated disallowance based on the volume of investments.

3. Estimation of disallowance by Assessing Officer:
The Assessing Officer estimated a disallowance of Rs.10,69,818 under S.14A due to the high volume of investments and presumed attribution of some expenditure to earning exempt income.

4. CIT(A)'s decision on restricting the disallowance:
The CIT(A) recognized costs related to investments but found the Assessing Officer's estimation excessive. Hence, the disallowance was limited to Rs.1 lakh, considering infrastructure, salary, and transaction costs associated with investments.

5. Appeal by Revenue challenging CIT(A)'s decision:
The Revenue challenged the CIT(A)'s decision to restrict the disallowance to Rs.1 lakh, leading to the present appeal before the Tribunal for reconsideration of the disallowance issue.

6. Tribunal's consideration of the issue in a related appeal:
The Tribunal previously considered a similar issue in the context of the assessee's appeal, where it was held that no disallowance was warranted under S.14A as no evidence proved specialized staff or specific expenditure for earning exempt income.

7. Tribunal's decision on the disallowance of expenditure:
Consistent with its previous ruling, the Tribunal rejected the Revenue's appeal, emphasizing that no disallowance under S.14A was justified without concrete evidence of expenditure directly or indirectly related to earning exempt income. The Tribunal upheld the deletion of the Rs.1 lakh addition by the CIT(A).

This comprehensive analysis outlines the key issues, assessments, decisions, and the Tribunal's final ruling regarding the disallowance of expenditure under S.14A r.w.r. 8D of the Act in the given legal judgment.