2018 (9) TMI 772 - AT - Income Tax

Disallowance u.s 14A - Allowable deduction u/s 37(1) - investment advisory fees paid to Tusk Investment Fund 1 and Tusk Investment Fund 2 - AO and CIT-A held that the investment advisory fees paid to Tusk Investment Fund 1 and 2 respectively are for earning tax free income and hence cannot be allowed deduction u/s 14A - Held that - In the present case, it not in dispute that the AO made the disallowance u/s 14A of the Act r.w. Rule 8D of the Income Tax Rules, 1962. It is also noticed that the assessee although earned the dividend income of ₹ 18,48,394/- which was claimed as exempt, but the disallowance was made by the assessee suo motto u/s 14A r.w. Rule 8D of the Income Tax Rules, 1962 for a sum of ₹ 29,44,969/-, the said fact has been accepted by the AO at page no. 4 of the assessment order dated 03.11.2014. It is well settled that as per the ratio laid down by the Hon ble Jurisdictional High Court in the case of Joint Investment (P.) Ltd. Vs CIT 2015 (3) TMI 155 - DELHI HIGH COURT that the disallowance u/s 14A of the Act can be made only to the extent of exempt income In the present case, since the assessee suo motto made the disallowance of ₹ 29,44,969/- u/s 14A of the Act r.w. Rule 8D of the Income Tax Rules, 1962, more than the exempt income claimed at ₹ 18,48,394/-. Therefore, no further disallowance was called for. - Decided in favour of assessee.

Issues Involved:
1. Disallowance of investment advisory fees under Section 37(1) of the Income Tax Act.
2. Disallowance of investment advisory fees under Section 14A of the Income Tax Act.
3. Requirement for the assessee to provide service details and justification for the payments made.

Issue-wise Detailed Analysis:

1. Disallowance of Investment Advisory Fees under Section 37(1):

The primary grievance of the assessee was the disallowance of ?1,20,92,020/- paid to Tusk Investment Fund 1 and Tusk Investment Fund 2 as investment advisory fees. The Assessing Officer (AO) disallowed this amount on the grounds that the assessee failed to provide evidence of services rendered by these funds. The AO contended that the expenses were not incurred wholly and exclusively for business purposes, as required under Section 37(1) of the Income Tax Act. The CIT(A) upheld this disallowance, emphasizing that the assessee did not submit any documentary evidence to establish the genuineness and reasonableness of the payments. The CIT(A) also highlighted the necessity for the assessee to prove that the expenditure was not capital or personal in nature and was laid out wholly and exclusively for business purposes.

2. Disallowance of Investment Advisory Fees under Section 14A:

The AO also disallowed the investment advisory fees under Section 14A, which pertains to expenses incurred in relation to earning tax-exempt income. The AO noted that the assessee had claimed dividend income of ?18,48,394/- as exempt under Section 10 of the Act and had already made a suo moto disallowance of ?29,44,969/- under Section 14A read with Rule 8D of the Income Tax Rules. However, the AO made an additional disallowance of ?91,47,051/-, arguing that the entire investment advisory fees were related to earning tax-free income. The CIT(A) supported this view, stating that no evidence was provided to show that the advisory services were not solely for earning tax-free income.

3. Requirement for the Assessee to Provide Service Details and Justification for Payments:

The CIT(A) observed that the assessee failed to provide details of the services received from Tusk Investment Fund 1 and Tusk Investment Fund 2. The assessee argued that the investments were made based on the advisory services provided by these funds and that such payments were made in compliance with tax laws. However, the CIT(A) noted that the assessee did not submit any evidence regarding the experience and expertise of the funds in the Indian market. The CIT(A) emphasized that the onus was on the assessee to prove the genuineness of the expenditure and the reasonableness of the payment.

Judgment:

The Tribunal considered the submissions and found that the AO made the disallowance under Section 14A read with Rule 8D. It was noted that the assessee had already made a disallowance of ?29,44,969/-, which was more than the exempt income of ?18,48,394/-. The Tribunal referred to the judgment of the Hon’ble Jurisdictional High Court in the case of Joint Investment (P.) Ltd. Vs CIT, which held that disallowance under Section 14A should only be to the extent of the exempt income. Therefore, the Tribunal concluded that no further disallowance was warranted beyond the suo moto disallowance made by the assessee. Consequently, the disallowance made by the AO and sustained by the CIT(A) was deleted, and the appeal of the assessee was allowed.

Conclusion:

The Tribunal allowed the appeal of the assessee, deleting the disallowance of ?1,20,92,020/- made by the AO and sustained by the CIT(A). The decision was based on the principle that disallowance under Section 14A should not exceed the exempt income, as established by the Hon’ble Jurisdictional High Court.

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