2016 (5) TMI 282 - AT - Income Tax

Disallowance u/s 14A r.w.r.8D - Held that - Ratio of the judgment in case of Joint Investment Pvt. Ltd. (2015 (3) TMI 155 - DELHI HIGH COURT ) is applicable to the facts and circumstances of the case because, in the instant case also, the AO by computing the disallowance exceeded the amount of income earned by the assessee; that no objective satisfaction has been recorded to reject the computation made by the assessee who has voluntarily made the disallowance u/s 14A to the tune of ₹ 54,217/-; that the assessee has sufficient funds to invest in the tax free investment which was part of its business activities; that the ld. CIT (A) has taken hypothetical figure of ₹ 22,05,762/- as voluntary disallowance made by the assessee u/s 14A as against the actual disallowance made by the assessee u/s 14A to the tune of ₹ 54,217/- and this fact goes to prove that the CIT (A) has proceeded to affirm the disallowance made by the AO without going into the merit. We, therefore, restrict the disallowance of ₹ 7,01,194/-, particularly when the assessee has not proved on record as to how his figure of ₹ 54,217/- was worked out. - Decided in favour of assessee partly

Summary

Issues:
Disallowance of expenses incurred in relation to earning tax-free income under section 14A r.w.r. 8D of Income Tax Act, 1961 without considering facts and circumstances of the case.

Analysis:
1. The appellant, M/s. Amar Packaging Pvt. Ltd., appealed against the order passed by Ld. CIT(A)-IV, New Delhi for the assessment year 2008-09, seeking to set aside the disallowance of expenses amounting to ?71,44,183 incurred in relation to earning tax-free income. The AO invoked Rule 8D of the Income-tax Rules to disallow the expenses, resulting in the assessment of total income at ?20,25,146.

2. The assessee earned exempt income in the form of dividend under section 10(34) of the Income-tax Act, 1961. The AO disallowed the expenses by invoking Rule 8D, leading to a disallowance exceeding the exempt income earned by the assessee. The matter was taken to the ld. CIT (A) and subsequently to the Tribunal through the present appeal.

3. The arguments presented by the ld. AR for the assessee highlighted discrepancies in the computation of disallowance made by the AO. The AO and CIT (A) computed the disallowance without recording objective satisfaction, as required under section 14A. The ld. DR for the revenue supported the orders passed by the AO/CIT(A).

4. The Tribunal observed that the AO and CIT (A) failed to record their satisfaction and rejected the computation made by the assessee. It was emphasized that the disallowance should not exceed the exempt income earned during the year, citing the principle established in the case of Joint Investments Pvt. Ltd. vs. CIT.

5. Referring to the judgment in the case of Joint Investment Pvt. Ltd., the Tribunal concluded that the disallowance made by the AO exceeded the income earned by the assessee. The Tribunal restricted the disallowance to the exempt income of ?7,01,194, as the AO's computation under Rule 8D was deemed unsustainable. The appeal was partly allowed for statistical purposes.

6. The Tribunal's decision was based on the principle that the disallowance under section 14A should not surpass the exempt income earned by the assessee. The judgment in the case of Joint Investments Pvt. Ltd. was pivotal in determining the extent of disallowance permissible under the law.