2015 (10) TMI 21 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - Held that - CIT(A) has given a finding that there was no expenditure incurred by the assessee for increase in investment and when the expenses in respect of exempt income have not been incurred by the assessee, the question of disallowance u/s. 14A does not arise. In assessee s case, increase in investment was from the funds available with the assessee and no interest has been paid, but there are certain expenditures which are incurred during the process of investment. While applying provisions under Section 14A of the Act and Rule 8D of the Income Tax Rules, these factors should be looked into. But in this case, the CIT(A) held that the Assessing Officer has not placed any material on record nor has he made any clear cut finding to prove that any expenditure had been incurred by the assessee and thus disallowance u/s. 14A read with Rule 8D is not warranted instead should have been remanded back the matter to the Assessing Officer to verify the expenditure incurred while earning the dividend income. Thus finding of the CIT(A) that the disallowance of ₹ 16,00,583 against dividend income of ₹ 96,622/- was not proper. In view of the above the matter is remanded back to the Assessing Officer for examining the expenditure incurred against the investment as against the dividend income earned by the assessee.

Summary

Issues:
Disallowance of expenses under Section 14A read with Rule 8D - Whether expenses incurred in earning exempt income - Whether disallowance justified - Whether disallowance under Section 14A warranted.

Analysis:
The Revenue filed an appeal against the order passed by CIT(A) XII, New Delhi, challenging the deletion of disallowance of Rs. 16,00,583 made by the Assessing Officer (AO) under Section 14A read with Rule 8D. The assessee, engaged in the business of manufacturing and selling spirits, IMFL, and country liquor, had made investments during the year and earned income not forming part of the total income. The AO disallowed the proportionate expenditure on investments under Section 14A, stating that only expenses related to earning taxable income could be allowed. The AO applied Rule 8D to calculate the disallowance, considering interest expenditure and one-half percent of the average value of investments. The CIT(A) noted an increase in investments made out of available funds, with no interest component involved, leading to no expenses incurred in earning the exempt income of Rs. 96,622.

The CIT(A) observed that the AO did not establish any expenses incurred by the assessee for the increase in investments. The AO's application of Section 14A read with Rule 8D lacked specific satisfaction in this case. The CIT(A) held that the AO did not provide a clear picture of the expenses incurred by the assessee, emphasizing the need to examine the actual expenditure. Referring to legal precedents, the CIT(A) highlighted the requirement for the AO to specify reasons for rejecting the claim of no expenditure and the need for a proximate cause for disallowance under Section 14A. The CIT(A) concluded that since no expenditure was incurred for the increase in investment, disallowance under Section 14A was unwarranted.

The CIT(A) suggested remanding the matter to the AO to verify the expenditure incurred while earning the dividend income, as the AO had not substantiated any expenses incurred by the assessee. The CIT(A) emphasized the importance of considering all relevant factors under Section 14A and Rule 8D before making a disallowance. Consequently, the appeal of the Revenue was disposed of, remanding the matter back to the AO for further examination of the expenditure against the investment and dividend income earned by the assessee.

In conclusion, the judgment focused on the necessity of establishing actual expenses incurred in earning exempt income, the requirement for a proximate cause for disallowance under Section 14A, and the importance of providing cogent reasons for rejecting claims of no expenditure. The judgment highlighted the need for a thorough examination of expenses before making disallowances under Section 14A and Rule 8D, emphasizing the AO's responsibility to substantiate any disallowances with concrete evidence.