2015 (8) TMI 118 - AT - Income Tax

Disallowance is called for u/s 14A - assessee has submitted that when the working under rule 8D gives contradictory result to the actual fact then the provisions of Rule 8D cannot be applied for the purpose of disallowance under section 14A - Held that - Having regard to the facts that the disallowance made by the AO by applying Rule 8D exceeds the amount of total expenditure debited by the assessee to the profit and loss account, we are of the view that for the purpose of disallowance u/s 14A, the computation made under Rule 8D cannot be accepted. So far as the provisions of Rule 8D(2)(iii) are concerned, the same cannot be applied in the case of assessee when the disallowance made u/s 14A on account of administrative expenses exceed the total expenditure debited on this account to the profit and loss account. Hence, Rule 8D cannot be applied for making disallowance u/s 14A on account of administrative expenses. The ld. AR submitted that the disallowance on account of interest expenditure is strategic one and the investment in question strategic in nature and not made with the intention of earning exempt income because the investment have been made in the sister concern and for commercial expediency. The authorities below have not examined this issue by considering fact that the investment in question are in the sister concern and are in the nature of strategic investment. However, the assessee itself has made a disallowance of ₹ 62.17 lakhs under section 14A which covers the interest expenditure of ₹ 50,58,468/- for the assessment year 2008-09, therefore, no further disallowance is called for u/s 14A. Similarly for the assessment year 2009-10, the assessee made suo motu disallowance ₹ 50.58 laksh u/s 14A no further disallowance is called for. - Decided in favour of assessee.

Summary

Issues:
- Disallowance under section 14A of the Income Tax Act for assessment years 2008-09 and 2009-10.
- Applicability of Rule 8D for disallowance computation.
- Disallowance of administrative expenses and interest expenditure.
- Strategic nature of investments for earning exempt income.

Issue 1: Disallowance under section 14A

The case involved cross-appeals against separate orders of the ld.CIT(A) for assessment years 2008-09 and 2009-10. The appellant, a public limited company, received dividend income and long-term capital gain, claimed as exempt under sections 10(35) and 10(38) of the Act. The AO disallowed a sum under section 14A computed as per Rule 8D, resulting in an addition to the income. The appellant contended that no further disallowance was necessary as it had already disallowed a portion of expenses. The ld.CIT(A) reduced the disallowance on administrative expenses and directed a separate disallowance of interest expenditure, leading to cross-appeals by both parties.

Issue 2: Applicability of Rule 8D for disallowance computation

The Tribunal considered whether the disallowance computed by the AO under Rule 8D exceeded the actual total expenditures debited by the appellant. The appellant argued that when Rule 8D contradicts the actual facts, it should not be applied for disallowance under section 14A. Citing a previous Tribunal decision, the Tribunal agreed that if the disallowance under Rule 8D exceeds the actual expenses, Rule 8D cannot be accepted for disallowance computation under section 14A.

Issue 3: Disallowance of administrative expenses and interest expenditure

The Tribunal analyzed the applicability of Rule 8D(2)(iii) in disallowing administrative expenses, concluding that when the disallowance exceeds the total expenses debited by the appellant, Rule 8D cannot be applied. Additionally, the appellant argued that the interest expenditure was strategic and not intended for earning exempt income, citing precedents. The Tribunal found that the appellant's suo motu disallowance covered the interest expenditure, hence no further disallowance was warranted under section 14A.

Issue 4: Strategic nature of investments for earning exempt income

The appellant contended that the investments in question were strategic and not solely for earning exempt income, referencing specific cases. The Tribunal noted the appellant's self-disallowance under section 14A, which already covered the interest expenditure, leading to the dismissal of further disallowance. Consequently, the assessee's appeals were allowed, and the revenue's appeals were dismissed.

This detailed analysis of the judgment highlights the key issues, arguments presented, and the Tribunal's findings, ensuring a comprehensive understanding of the legal aspects involved in the case.