2016 (5) TMI 471 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Held that - Rule 8D comes into operation where the Assessing Officer is not satisfied in relation to income which does not form part of the total income under this Act and thereafter if the Assessing Officer is unable to determine the amount of such expenditure incurred in relation to the income which does not form part of the total income then he may resort to the method with prescribed in Rule 8D of the IT Rules, 1962. Assessing Officer completely ignored the facts appearing in the computation of total income wherein assessee has added back security transactions tax of ₹ 69,482/- and management fees of ₹ 11,09,173/- to the net profit as per profit and loss account. As per submissions made by ld. AR it has been mentioned that dividend income of ₹ 4.29 crores is derived from mutual funds and assessee has paid a management fees of ₹ 11,01,973/- as a portfolio management fees to the portfolio manager who has taken care of the dealings of the assessee in regard to investment for various mutual funds including switching but not switching out from one fund to another in order to optimum benefit to the assessee. In the given situation where the assessee has himself added a sum of ₹ 11,71,455/- to its total income in relation to expenditure incurred for earning exempt income then there remains no reason to sustain the addition of ₹ 8,84,542/- as made by ld. Assessing Officer under the provisions of section 14A of the Act. We therefore, delete the same - Decided in favour of assessee

Summary

Issues Involved:
Appeal against disallowance of expenditure u/s 14A of the IT Act.

Detailed Analysis:

Issue 1: Disallowance of Expenditure u/s 14A of the IT Act
- The assessee appealed against the order confirming the disallowance of ?8,84,542 under section 14A of the IT Act, 1961 related to alleged expenditure incurred in relation to exempt income.
- The assessing officer observed that no expenditure was shown in relation to the exempt income of ?5,83,57,253. The assessee explained that the investments were made from its own funds, and certain expenses were already disallowed.
- The assessing officer calculated ?8,84,542 as expenditure in relation to exempt income under Rule 8D(iii) and added it to the total income.
- The assessing officer failed to consider the explanations provided by the assessee and proceeded to make the disallowance mechanically based on the formula under section 14A.
- The assessing officer did not record any satisfaction or cite any expenditure linked to earning exempt income.
- The Tribunal noted that the assessing officer ignored the facts where the assessee had already added back certain expenses related to exempt income in the computation of total income.
- The Tribunal found that the assessee had paid management fees for portfolio management services, and as the expenses were already added to the total income, there was no justification for the additional disallowance under section 14A.
- Therefore, the Tribunal deleted the disallowance of ?8,84,542 and allowed the appeal of the assessee.

Conclusion:
The Tribunal allowed the appeal of the assessee against the disallowance of expenditure under section 14A of the IT Act, as the assessing officer failed to consider the expenses already added back to the total income by the assessee. The Tribunal found no justification for the additional disallowance and deleted the same.