2016 (7) TMI 620 - AT - Income Tax

Disallowance u/s 14A - apportionment of expenses - Held that- We find that the total expenses debited to profit and loss account is ₹ 2,28,25,154/- and out of this, direct expenses of consultancy and professional charges amounting to ₹ 1,96,48,885/- for earning consultancy income i.e taxable income would be automatically out of the purview of computing disallowance u/s 14A of the Act. The remaining common expenses of ₹ 31,76,269/- have to be apportioned between taxable and non-taxable income. We find that the ratio of apportionment adopted by the assessee at 45.5% in the income component is very fair and accordingly direct the Learned AO to disallow ₹ 14,45,202/- being 45.5% of ₹ 31,76,269/- u/s 14A of the Act to meet the ends of justice. We hold that the Learned AO cannot mechanically apply the provisions of Rule 8D for the purpose of disallowance u/s 14A of the Act. In our opinion, the same could be used only as a last resort only in the event of the AO not able to make a fair substitution of the disallowance figure as contemplated u/s 14A(2) of the Act. In any case, the provisions of the Act would always prevail over the Rules as admittedly the Rules are only subordinate piece of legislation and are meant only to support the Act. Rules could act only as a guiding force to effectively implement the provisions of the Act. If the manner so contemplated in the Act fails, then as a last resort, the AO should go to Rules for making disallowance u/s 14A . Hence we hold that the Learned AO has got sufficient powers to substitute the disallowance figure at ₹ 14,45,202/- in terms of section 14A(2) of the Act itself and hence Rule 8D need not be followed in the facts of the instant case. - Decided partly in favour of assessee.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961.

Analysis:
The appeal before the Appellate Tribunal ITAT Kolkata arose from an order of the Learned CITA regarding the disallowance under section 14A of the Act in the assessment year 2010-11. The only issue to be decided was whether the disallowance under section 14A could be made in the given circumstances. The assessee, engaged in management consultancy, trading, and investment activities, had substantial investments in shares yielding dividend income. The Learned AO invoked section 14A and made a disallowance, which the assessee contested before the tribunal.

The crux of the matter was whether the consultancy and professional fee expenditure of the assessee, directly attributable to the management consultancy income, should be excluded from the disallowance under Rule 8D(2)(iii). The disagreement stemmed from the interpretation of a consultancy agreement clause, with the assessee arguing that the fees were for consultancy services, not investment decisions. The tribunal noted the absence of separate accounts for expenditure related to investment activities.

The tribunal analyzed the details of income and expenses provided by the assessee, considering direct expenses for consultancy income and common expenses. It observed that the assessee had made a suo moto disallowance under section 14A based on a fair apportionment of common expenses. Referring to a previous year's decision, the tribunal directed the AO to disallow a specific amount towards non-taxable income to meet the ends of justice.

Furthermore, the tribunal clarified that Rule 8D should be a last resort for disallowance under section 14A, emphasizing that the provisions of the Act prevail over Rules. It held that the AO had the power to determine the disallowance figure without mechanically applying Rule 8D, as long as it aligns with section 14A(2). Consequently, the tribunal partly allowed the grounds raised by the assessee and directed the AO to make the disallowance accordingly.

In conclusion, the appeal was partly allowed by the tribunal, emphasizing a fair apportionment of expenses and the AO's discretion in determining the disallowance figure under section 14A without rigidly following Rule 8D.