2016 (1) TMI 309 - AT - Income Tax

Disallowance of expenses on account of exempted income - Held that - We find that assessee has earned income from source of dividend which is exempted under income tax Act. We understand that a company cannot earn dividend without its existence and management. Investment decisions are very complex in nature. It requires substantial market research day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares, mutual funds etc., at the most, appropriate time. The investment requires availability of funds and consequential blocking of funds. It is well known that capital has cost and the element of cost is represented by interest. Besides investment decisions are generally taken in the meeting of Board of Directors for which administrative expenses are incurred. It is therefore, not correct to say that income can be earned by incurring no or nominal expenditure. We further observed that originally at the time of assessment order, assessee did not offer any disallowance at its own but disallowed the expenses to the tune of ₹ 2,74,150/- at its own during the appellate stage. However, we find that the rule 8D is applicable w.e.f 24th day of March 2008 i.e. from the assessment year 2008-09. Hence the provisions of Rule 8D does not apply to the relevant year under consideration i.e. Assessment year 2007-08. So prior to the applicability of Rule 8D, different ITAT benches has considered 1% of dividend income as reasonable disallowance under section 14A of the Act. However, we are finding from the CIT(A) order that the assessee has offered the disallowance of ₹ 274150.00 which is more than 1% of the exempted income. Therefore we are inclined to restrict the disallowance at the same amount. - Decided in favour of assessee

Summary

Issues:
Challenge to disallowance of expenses on exempted income.

Analysis:
The appeal arose from the Commissioner of Income Tax (Appeals) VI's order regarding the disallowance of expenses on exempted income. The assessee, a private limited company engaged in trading and investment, earned exempted income of Rs. 2,30,23,830 from dividends during the assessment year 2007-08. The Assessing Officer (AO) disallowed expenses amounting to Rs. 14,40,020, calculated at 0.5% of the average value of investments, based on the retrospective application of rule 8D. The AO's decision was upheld by the CIT(A), who considered the proportion of expenses to income and relied on relevant case law, including the Bombay High Court's decision in Godrej & Boyce Manufacturing Co. Ltd. The CIT(A) found the disallowance appropriate and reasonable, leading to the dismissal of one ground and allowance of another.

The ITAT Kolkata, comprising Mahavir Singh, JM, and Waseem Ahmed, AM, heard the appeal. The tribunal noted that earning dividend income requires significant management decisions, market research, and administrative expenses. The tribunal referred to the Chennai Bench's decision in Southern Petrochemical Industries v. DCIT to emphasize the complexity and cost involved in investment decisions. The ITAT observed that the rule 8D, which was not applicable for the relevant assessment year, led to different ITAT benches considering 1% of dividend income as a reasonable disallowance under section 14A. Citing various case laws, the tribunal found that the assessee's self-disallowance of Rs. 2,74,150 exceeded 1% of the exempted income, leading to the decision to restrict the disallowance to the same amount.

In conclusion, the ITAT Kolkata allowed the assessee's appeal, pronouncing the order on 13.11.2015.