2018 (3) TMI 1398 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - Held that - In the instant case the AO has not recorded any dissatisfaction as to the claim of the assessee that no expenditure was incurred to earn exempt income as per its account and in such circumstances the computation under sub-rule (2) of Rule 8D cannot be made. In this case undisputedly the assessee has earned dividend income to the tune of Rs. 200/- but disallowance u/s 14A read with Rule 8D has been made to the tune of Rs. 3, 71, 410/-. Hon ble Delhi High Court in Joint Investments (P.) Ltd. (2015 (3) TMI 155 - DELHI HIGH COURT) case also decided the identical issue that disallowance u/s 14A is to be made only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income. So we are of the considered view that in any case disallowance cannot be made more than exempt dividend income earned by the assessee. So impugned order passed by the ld. CIT (A) is not sustainable in the eyes of law hence the addition made by the AO and confirmed by the ld. CIT (A) by invoking the provisions of section 14A and Rule 8D is to be restricted to the earned exempt income i.e. Rs. 200/-. Consequently present appeal filed by the assessee is partly allowed.

Summary

Issues:
1. Disallowance u/s 14A of the Income Tax Act.
2. Justification of disallowance amount.
3. Expenditure incurred for earning exempt income.
4. Applicability of Rule 8D for disallowance calculation.
5. Judicial interpretation of Section 14A and Rule 8D.

Issue 1: Disallowance u/s 14A of the Income Tax Act
The appellant sought to set aside the order passed by Ld. CIT(Appeals)-2, New Delhi regarding the addition made by the Assessing Officer u/s 14A in the total income of the assessee company. The appellant contested that the order was erroneous as it confirmed the AO's decision. The AO invoked provisions contained u/s 14A read with Rule 8D of the Income-tax Rules, 1962, and determined the indirect expenditure under sub-rules (2) and (3) of Rule 8D at Rs. 3,71,345/-, resulting in an addition of Rs. 3,71,410/-.

Issue 2: Justification of disallowance amount
The appellant argued that the addition made u/s 14A of the Act at Rs. 3,71,410/- was unjustified and against the law. The AO had made the disallowance based on the average value of investments. However, the appellant contended that no expenses had been incurred for earning exempt income, thus challenging the validity of the disallowance amount.

Issue 3: Expenditure incurred for earning exempt income
The appellant claimed to have incurred administrative expenses, including professional charges, audit fees, and other expenses, which were claimed as exempt u/s 37(1) of the Income-tax Act. The appellant highlighted that no expenses were directly related to earning exempt income, specifically dividend income amounting to Rs. 200/- during the relevant year.

Issue 4: Applicability of Rule 8D for disallowance calculation
The Tribunal analyzed the applicability of Rule 8D for calculating the disallowance under Section 14A. The Tribunal noted that the AO did not record any dissatisfaction regarding the claim that no expenditure was incurred to earn exempt income, as per the accounts. Thus, the computation under sub-rule (2) of Rule 8D was deemed inappropriate in this case.

Issue 5: Judicial interpretation of Section 14A and Rule 8D
The Tribunal referred to judicial precedents, including the decision in Joint Investments (P.) Ltd. vs. CIT and CIT vs. Taikisha Engg. India Ltd., to interpret Section 14A and Rule 8D. The Tribunal emphasized that disallowance u/s 14A should only be to the extent of expenditure incurred by the assessee in relation to tax-exempt income. Therefore, the disallowance amount should not exceed the exempt dividend income earned by the assessee, which was Rs. 200/-. Consequently, the Tribunal partly allowed the appeal, restricting the disallowance to the earned exempt income.

In conclusion, the Tribunal ruled in favor of the appellant, limiting the disallowance amount to the extent of the earned exempt income, as per the judicial interpretation of Section 14A and Rule 8D. The impugned order passed by the ld. CIT (A) was deemed unsustainable in the eyes of the law, leading to the partial allowance of the appeal.