2019 (1) TMI 580 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - exclusion of expenses not related to exempt income - Held that - The provision of Rule 8D requires to make the disallowance of the expenses even if the assessee claim that he has not incurred any expense in relation to such dividend income. But the AO before making the disallowance needs to refer the books of accounts. In the instant case, we note that the assessee has claimed total administrative expenses amounting to ₹ 8,73,482/- only. The detail of the same is placed out of such expenses, there were two major expenses of ₹ 2,45,000/- and 4,69,443/- under the head loss on sale of fixed assets and travelling expenses respectively. If we exclude these two major expenses the remaining expenses are of ₹ 1,59,039/- only which can only be considered for the purpose of disallowance u/s 14A r.w.r. 8D. It is because in our view the amount of expenses represented on account of loss on sale of fixed assets and travelling expenses cannot be linked with the expenses incurred for the purpose of earning the exempted income. We hold that the AO has made the disallowance u/s 14A r.w.r 8D without having regard to the books of accounts of the assessee as mandated under the provision of Section 14A r.w.r. 8D. We note that the assessee has claimed Demat charges amounting to ₹ 3,569/- which are directly connected with the dividend income as envisaged in the provision of Rule 8D (2)(i) of Income Tat Rule. Therefore, we sustained the addition of ₹ 3,569/- on account of Demat Charges. Thus, we set aside the order of CIT(A) and direct the AO to delete the addition of ₹ 5,70,349/- only. - Appeal of the assessee is partly allowed.

Summary

Issues Involved:
1. Confirmation of assessment order passed by the Assessing Officer (AO) under Section 143(3) of the Income Tax Act.
2. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.
3. Request for cost award due to arbitrary order passed by the department.

Detailed Analysis:

Issue 1: Confirmation of Assessment Order
The appellant contested the confirmation of the assessment order passed by the AO under Section 143(3) of the Income Tax Act by the Commissioner of Income-Tax (Appeals) [CIT(A)]. However, the primary grievance was centered on the disallowance under Section 14A, which is discussed in detail under Issue 2.

Issue 2: Disallowance under Section 14A r.w.r. 8D
The appellant, engaged in trading and investment in shares and mutual funds, earned a dividend income of ?21,47,943, which was claimed as exempt under Section 10(34) of the Income Tax Act. The AO made a disallowance of ?5,73,918 under Section 14A read with Rule 8D, arguing that it was not plausible to have made such substantial investments without incurring administrative expenses. This disallowance included:
- Direct Expenses: ?3,569
- Interest Expenses: Nil
- Administrative Expenses: ?5,70,349

The CIT(A) upheld the AO's disallowance, noting that the appellant failed to provide a bifurcation of stock in trade and investments and that the AO's view on administrative expenses was justified.

The appellant argued that no administrative expenses were incurred for earning the exempt income and that the disallowance was made without reference to the books of accounts. The appellant also highlighted that major expenses such as loss on sale of fixed assets and traveling expenses should not be linked to the earning of exempt income.

Upon review, the Tribunal found that the AO did not satisfy the requirement of referring to the books of accounts before making the disallowance, as mandated by Section 14A r.w.r. 8D. The Tribunal noted that out of the total administrative expenses of ?8,73,482, significant expenses like loss on sale of fixed assets and traveling expenses, amounting to ?7,14,443, should not be considered for disallowance. Therefore, only ?1,59,039 could be considered for disallowance.

The Tribunal cited the judgment of the Hon’ble Allahabad High Court in CIT vs. UP Electronics Corporation Ltd., emphasizing that the AO must objectively satisfy the correctness of the claim by referring to the accounts of the assessee. The Tribunal concluded that the AO acted beyond the provision of law by not referring to the books of accounts.

Consequently, the Tribunal allowed the disallowance of ?3,569 on account of Demat charges, which were directly connected to the dividend income, but directed the AO to delete the remaining disallowance of ?5,70,349.

Issue 3: Request for Cost Award
The appellant requested a cost award due to the arbitrary manner in which the department passed the order. However, this request was not substantively addressed in the judgment.

Conclusion:
The appeal was partly allowed. The Tribunal directed the deletion of ?5,70,349 from the disallowance under Section 14A r.w.r. 8D, sustaining only ?3,569 related to Demat charges. The order was pronounced on 15th October 2018 at Ahmedabad.