2014 (6) TMI 597 - AT - Income Tax

Disallowance u/s 14A of the Act Nexus between the expenses debited and the exempt income - Held that - Maxopp Investment Ltd. & Others Versus Commissioner of Income Tax 2011 (11) TMI 267 - Delhi High Court - if no expenditure is found to have been incurred for earning exempt income disallowance u/s 14A could not be made by the AO - Sub-section (3) of Section 14A further extends the scope of sub-section (2) and the AO is required to record the similar finding even where the assessee claims that no expenditure has been incurred by him in relation to the exempt income- the AO has to record his satisfaction as required by sub-section (2) & (3) of Section 14A is accepted. CIT(A) while exercising his appellate jurisdiction has exercised his co-terminus power with that of AO and has recorded his dissatisfaction with the correction of the claim of the assessee that no expenditure was incurred in relation to income which does not form part of the total income under the Act - the assessee is not forthcoming with the expenditure incurred by it to earn to exempt income a procedure has been prescribed by the statute which has been followed in this case and the disallowance has been calculated as per the prescribed method envisaged in Rule 8D and the assessee has failed to show any mistake in the calculation made under the Rule so the order need not be disturbed. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the Act the officer exercising jurisdiction while assessing the assessee will have to verify the correctness of the claim - If the assessee s reply/ explanation are not acceptable for the authorities then it shall state reasons and after recording his dissatisfaction shall reject the claim - the authorities have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the Act - CIT(A) exercised his co-terminus power and after recording his dissatisfaction as to the claim of the assessee in respect to expenditure in relation to exempt income has computed the expenditure as provided under Rule 8D as one-half percent of the average value of the investment income which does not form part of the total income is taken - The AY under consideration is 2008-09 and Rule 8D was applicable - the AO and CIT(A) has computed the disallowance under Rule 8D and as per formula provided under Rule 8D the disallowance worked out to Rs. 13, 82, 741 - CIT(A) in exercise of his co-terminus powers has recorded satisfaction as envisaged u/s 14A and the assessee is not able to point out any mistake in the disallowance made under Rule 8D and since the disallowance under Rule 8D had been worked out as per the formula given in the Rules the order of the CIT(A) is upheld Decided against Assessee.

Issues Involved:
1. Whether the Commissioner of Income Tax (Appeals) erred in disallowing expenses under Section 14A of the Income Tax Act, 1961.
2. Whether there was a nexus between the expenses debited and the exempt income.
3. Whether the assessee incurred any expenses for earning the exempt dividend income.
4. Whether the Assessing Officer recorded satisfaction regarding the correctness of the assessee's claim before applying Rule 8D.

Issue-wise Detailed Analysis:

1. Disallowance of Expenses under Section 14A:
The appeal was filed by the assessee against the order of the CIT(A)-XV, New Delhi, which upheld the disallowance of expenses under Section 14A of the Income Tax Act, 1961. The assessee argued that no expenses were incurred for earning the exempt dividend income from mutual funds, and hence, no disallowance should be made. However, the Assessing Officer (AO) computed the disallowance as per Rule 8D, resulting in an addition of Rs. 13,82,741/- to the total income of the assessee.

2. Nexus Between Expenses Debited and Exempt Income:
The assessee contended that there was no nexus between the expenses debited to the profit and loss account and the exempt income. The assessee claimed that the dividend income was earned from mutual funds, which were not purchased from borrowed funds, and no expenses were incurred in relation to earning this income. The AO, however, did not accept this explanation and held that some expenses are always related to earning income, thereby invoking Rule 8D to compute the disallowance.

3. Incurrence of Expenses for Earning Exempt Income:
The assessee argued that no portion of the expenses debited to the profit and loss account was related to earning the exempt dividend income. The assessee also stated that the investment in mutual funds was based on free advisory services from Deutch Bank Investment Advisors, which did not charge any fees. The CIT(A) and AO rejected this claim, stating that it is impossible to believe that no expenses were incurred for managing investments worth Rs. 36.19 crores. They concluded that some administrative and managerial costs must have been incurred, justifying the disallowance under Rule 8D.

4. Recording of Satisfaction by the Assessing Officer:
The assessee contended that the AO did not record satisfaction regarding the correctness of the assessee's claim before applying Rule 8D, as required by Section 14A(2) and (3). The AO had asked the assessee to explain why expenses for earning dividend income should not be disallowed, and after considering the assessee's reply, the AO rejected it and applied Rule 8D. The CIT(A) supported the AO's decision, stating that the AO's rejection of the assessee's explanation implied dissatisfaction with the claim. The CIT(A) also exercised his co-terminus powers to record satisfaction and compute the disallowance as per Rule 8D.

Conclusion:
The Tribunal upheld the order of the CIT(A), confirming the disallowance of Rs. 13,82,741/- under Section 14A read with Rule 8D. The Tribunal found that the AO and CIT(A) had correctly applied the provisions of Section 14A and Rule 8D, and the assessee failed to demonstrate any mistake in the disallowance computation. The appeal of the assessee was dismissed.

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